Personal PensionMay 18 2016

The good, the bad and the ugly

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Master trust pension schemes have been around for decades, providing both defined benefit (DB) and defined contribution (DC) pensions for employees of all different types of employers.

Why then have they been receiving so much attention recently, much of it adverse, with the Pensions Regulator recently announcing that addressing the quality and viability of these schemes will be a top priority for them over the next three years?

The answer to this question lies in the constitution of master trust pension schemes and their increasing popularity following the advent of auto-enrolment into workplace pensions in 2012.

What is a master trust pension scheme?

The Pension Regulator’s definition of a master trust scheme is: “An occupational trust-based pension scheme established by declaration of trust which is or has been promoted to provide benefits to members who are staff of employers which are not connected and where each employer group is not included in a separate section with its own trustees.”

These vehicles have increased in popularity since the auto-enrolment workplace pension duties were introduced in 2012. Starting from October of that year, employers have been required to provide their employees with a qualifying pension scheme and to contribute to the scheme.

For many employers, master trusts, have been the auto-enrolment scheme of choice for a number of reasons. One consideration has been the ability for employers to get a refund for contributions for employees who left them with less than two years’ service. This option has never been possible for personal pension providers.

Short service refunds were, however, abolished last October and yet the popularity of master trusts has not diminished. So, employers are not just choosing them so they can ‘get their money back’.

Other reasons for the popularity of master trusts are that:

They save employers the time and expense of setting up their own trust based pension scheme.

The charges can compare very well with the main personal pension providers.

Many schemes are aimed at smaller employers that pension providers are not actively marketing to.

Nest (the National Savings Employment Trust) set up to help employers with their auto-enrolment duties is a master trust scheme.

It may seem so far so good, but master trusts have been the subject of bad press.

As observed by The Pensions Regulator in its 2016 Corporate Plan, the roll-out of auto-enrolment has driven a substantial rise in DC pension scheme membership and an increase in newly created master trusts, some of which now have over 1m members.

Consequently, members are increasingly in a handful of schemes – 55 per cent of DC scheme members are in the four largest master trusts and there are 69 much smaller open master trust schemes. The regulator’s research shows that large schemes benefit from economies of scale, tend to be better governed, have better member communications, and provide better value for members.

However, a major failure of a large master trust, having no sponsoring employer to support it, could result in members being forced to meet the administration costs as a result of, according to the Regulator, “its disorderly exit from the market”.

It would also leave potentially large numbers of employers needing to immediately find alternative arrangements to comply with their pension duties.

Also, the regulator is concerned that those members of the smaller master trust schemes could become “trapped” in a scheme with insufficient new members or assets to remain sustainable.

This could further erode confidence in pensions and lead to a significant loss of member savings.

It is worth noting that, of the master trust providers registered with The Pensions Regulator, only five have currently been given the Master Trust Assurance Framework ‘kite mark’.

So, what is being done?

The regulator has promised to “guide employers to automatically enrol their staff into multi-employer schemes, such as group personal pensions run by FCA-authorised providers and master trusts that have obtained master trust assurance”.

Where they have concerns about the governance and administration of particular master trusts, the regulator will also “engage directly with them to check the skills and experience of their trustees and managers and the sustainability of their business models”.

Separately, the economic secretary to the Treasury has said that government will legislate on master trusts “as soon as practically possible”.

So, concerns over the management and oversight of master trust pension schemes are being addressed and such schemes are already subject to additional requirements in governance regulations.

This rapid response is to be applauded. It is imperative that the beleaguered pension industry is not subject to further scandals.

Master trusts can be the right solution for an employer and its workforce. They allow the employer to obtain the benefits of an occupational scheme without taking on the burden or expense of setting up and managing its own scheme structure and board of trustees.

They can also be more versatile than their contract based counterparts (personal and stakeholder pensions). Unlike contract based schemes, master trusts are not regulated by the FCA. They also introduce the possibility for the trustees to make changes to the scheme’s investment choices without the need to write out to gain consent from every member - a potential benefit if default funds, where most members are invested, underperform.

Conversely, the range of choice and flexibility can be much more restrictive within a master trust compared to contract based schemes.

The lesson for employers from all of this is to do their homework first and to take advice over their workplace pension choices is recommended.

A list of independently reviewed master trusts which are open to all employers is already available on the employers’ section of The Pension Regulator’s website. Now group personal pension providers, which meet similar criteria, are being encouraged to apply to appear on a new list on the website, increasing the choice of well-run schemes available.

John Wilson is technical director of JLT Employee Benefits

Key points

Master trusts have increased in popularity since the auto-enrolment workplace pension duties were introduced in 2012.

They save employers the time and expense of setting up their own trust based pension scheme.

A major failure of a large master trust, having no sponsoring employer to support it, could result in members being forced to meet the administration costs.