In this year of mass automatic enrolment, master trusts have come under scrutiny, sometimes unfairly. While there is work to be done to ensure all master trusts are equally robust, there are some myths surrounding them that need to be debunked.
Almost three-quarters of all employers that have staged so far used a master trust and Nest itself, the Government’s own workplace pension scheme, is a master trust.
The first myth is that anyone can set up a master trust for little expense, including, supposedly, unscrupulous providers who may not have members’ best interests at heart. From a cost perspective alone, this is unlikely.
First of all, many professionals need to be involved, from the lawyer needed to draft the trust document, to the trustees, to the administrators. Costs for the trustees alone are likely to be close to £50,000 per year. Of course, while these costs can be kept to a minimum, appointing high quality and well-regarded professionals is crucial for the credibility of any master trust.
Without a network of pension professionals in place from the beginning, it can be difficult for a master trust to gain traction, particularly where trustees are concerned. Current rules mean that a new master trust needs at least three trustees with two of them being independent, since the trustees are there to be the conscience of the master trust. The trustees are responsible for all members of the scheme which is a significant protection.
Of course, setting up a master trust is just the tip of the iceberg in terms of costs. Any new provider will be lucky to retain 20-30bps and many are working on much smaller margins than that.
To put this into perspective, for every £1m of contributions at 20bps the provider would see gross income of just £2,000. For this reason, many providers have to charge the employer a fee to set up the scheme. Therefore any master trust entering the market needs to have a long-term sustainable business model to ensure its survival.
Another myth is that the regulation and governance of master trusts is inferior to that of contract-based solutions and group personal pensions. This is widely misunderstood.
Master trusts are regulated by The Pensions Regulator and GPPs are regulated by the FCA. In an attempt to raise the bar on governance, The Pensions Regulator has worked with the accountancy body ICAEW to create the Master Trust Assurance Framework.
While this is voluntary, in practice, any scheme wanting to be taken seriously needs to gain this certification. Again costs come into play, as the cost of the audit and the responsibility in meeting MAF requirements is around £100,000.
This is a pivotal year for auto enrolment. As well as the recent DWP inquiries, the upcoming budget is likely to throw some changes into the mix in the form of tax relief on pensions.
There is work to be done, as with any maturing market, but the future for the master trust sector is a lot brighter than many commentators would have you believe.
Graham Peacock is managing director of Salvus Master Trust