Fiona Matthews reviews the benefits of master trusts for occupational pension schemes, explains how to choose one and warns of smaller, unsustainable providers damaging market reputation
The introduction of auto-enrolment in 2012 into workplace pension schemes, together with the shift away from defined benefit pensions, has assisted in making the UK defined contribution (DC) market the largest in the EU. As a result, the Pensions Policy Institute predicts that by 2030, there will be £554bn of DC assets under management in the UK.
The range of governance structures available for DC pension provision includes contract based, such as stakeholder or personal pensions, and trust-based occupational schemes, which can be individual trusts or, more recently, master trusts. The latter are multi-employer occupational schemes, usually for DC benefits, where an independent trustee board makes decisions in the best interests of all its members and oversees the service providers.
Over 70 master trusts are now available for UK employers to choose from, many having launched since the introduction of auto-enrolment. These have risen in popularity as they are able to help meet a variety of needs in addition to auto-enrolment compliance. They include the ability to accept DC assets from a single trust that the employer no longer wishes to support, allowing them to wind up that trust and avoid the need for ongoing oversight.
Another benefit is their ability to act as an 'at retirement' partner to receive funds at retirement, to facilitate the employer offering the more administratively complex options, where the fund remains invested in retirement and the member draws benefits at regular or irregular intervals. This is termed 'flexible drawdown' and 'uncrystallised funds pension lump sums'.
Concerns about the safeguards that master trusts offer to members have been expressed by various industry voices. Andrew Warwick Thompson, executive director for regulatory policy at the Pensions Regulator (tPR), is reported to have said that some of the small pension providers "may not be run by competent people". Such comments can potentially scare and prevent people having confidence to save in pensions, as well as leading many employers to question just how safe defined contribution master trusts are.
Effective regulation
Contract-based DC schemes are regulated by the Financial Conduct Authority (FCA), whereas trust-based arrangements, of which master trusts are a subset, fall under the supervision of tPR. Mandating all master trusts to obtain the Master Trust Assurance Framework (MAF) accreditation, developed by tPR and the Institute of Chartered Accountants in England and Wales, could go some way to improving governance standards. While such industry-recognised accreditations do require major investment, they would underscore that the pensions industry is reputable and trustworthy, and promote best practice on charges, governance and communications.
The Pension Quality Mark Ready accreditation, facilitated by the Pensions and Lifetime Savings Association, demonstrates delivery of high standards of member engagement and communications.
Chief executive of tPR, Lesley Titcomb, has talked of her desire for a solvency requirement for master trusts, and for the MAF accreditation to include the requirement to have a discontinuance plan in case of a trust failing. If the master trust provider is a well established, profitable enterprise, with diverse lines of business, geographies and clients, it is unlikely to hang a failed master trust out to dry. Its reputation would be damaged if it did not keep its members' savings safe. Nonetheless, ensuring the right regulation is there to support the industry will secure the success of reputable master trusts, and help to garner the interest of employers who are looking for a safe option.
Protecting members' assets
Most master trusts in the UK invest members' assets through an insurance policy, where they are held by a custodian. This segregation of the assets from the investment manager helps protect members in the event that the manager were to fail. Furthermore, arrangements held under an insurance policy fall under FCA regulation and are covered by the Financial Services Compensation Scheme (FSCS).
There will be some variation between master trusts, so employers looking to select one should uncover what protections are in place for members' assets should the investment manager or the investment platform fail. This ensures employers are able to identify schemes that are well regulated and have their members' best interests in mind. However, provided the master trust takes its responsibilities to members seriously, we don't expect there to be much difference in this respect between tPR-only regulated master trusts and master trusts from insurers that are also regulated by the FCA.
Across the pension industry there is a clear need to help pension managers and trustees navigate the increasing complexity in pension governance. Whether all schemes will be able to do so remains to be seen, since there are so many other obligations and requirements to be addressed in an environment with limited resources.
The scale and expertise offered by a high-quality master trust provider means they may be better equipped to tackle the challenges of improving member outcomes, communicating complex issues, looking after ongoing compliance requirements, and helping members better understand the choices that they make. They may also offer better value for money than many own-trust arrangements.
From an employer's perspective, it is important to know the makeup and structure of any trustee board arrangements from a practical viewpoint. Evaluating the trustees' experience and professional credentials, and asking questions such as how often they meet, what policies they have in place, and how they make decisions, gives useful insights into the structure and quality of a board and whether the trust is performing well or not.
Understanding these arrangements will better help employers identify which master trust will suit their employees.
What does the future hold?
When selecting a master trust, employers need to exercise caution. They should be able to outsource their pension provision with confidence, providing they undertake a robust due diligence process.
Consolidation in the UK master trust market, which has been much anticipated, is likely to solve many of the concerns around the security of member assets for smaller enterprises.
The recent Queen's speech made it clear that legislative changes are coming that will affect a potential new provider's entry to the market and the powers of tPR, with further details to follow. In the interim, here are my suggestions on the measures the industry should take to ensure that master trusts remain a reliable way of saving money for retirement:
- Establish a process by tPR to approve the setup of new schemes, and require compulsory MAF accreditation within 12 months, and before new business can be taken on
- The FCA and tPR quietly direct market consolidation for non-compliant or sub-scale master trusts
- Master trusts that don't have a government-backed guarantee or FSCS protection to obtain insurance in order to demonstrate credibility.
Master trusts can play an important role in improving outcomes for DC members. Bringing scale to bear on the costs members face and in the member communication and engagement tools - allied to professional governance standards - master trusts are likely to be able to provide better solutions than all but the most committed single-employer trust arrangements.
This could be undone if the reputation of master trusts is diminished by market failures of more marginal providers and a lack of appropriate oversight.
Fiona Matthews is managing director of LifeSight, Willis Towers Watson's master trust