Pension savers face seeing their assests stranded in “zombie” workplace schemes unless the plethora of smaller master trusts consolidate, it has been warned.
Mergers of occupational schemes holding lesser amounts of retirement money offer the best course for savers, according to Henry Tapper, founder of auto-enrolment service Pensions PlayPen and director of First Actuarial.
One trust has been approached by three rivals seeking mergers amid fears they will not survive the next three to six months.
But with consolidation costs likely to be significantly higher than the government’s 0.75 per cent charge cap, Mr Tapper said smaller or failing schemes would simply be abandoned, becoming “stranded assets” or “zombie arrangements”, with savers’ money sitting dormant.
“Master trusts in trouble will have to be consolidated, and where there is no money, close down,” Mr Tapper said.
One adviser said she knew of an investigation into high consolidation costs at a master trust which led to an £850,000 bill for the scheme.
Many new workplace pension schemes have launched in the four years since auto-enrolment, and now there are 73 master trusts – multi-employer occupational pension schemes of various sizes run by trustees making decisions on investment and service providers.
Jade Murray, partner at Aldeshaw Goddard, outlined a case where The Pensions Regulator (TPR) took action against a scheme because of the high level of fees it was charging members.
The resulting seven-month investigation by independent trustees and their lawyers cost £850,000, she said.
“As a pensions lawyer and an independent trustee – I find that a horrific figure.
Duncan Buchanan, partner at Hogan Lovells, said there was “a significant risk” that a lack of consolidation could lead to zombie schemes.
Graham Peacock, managing director at the Salvus Master Trust said some consolidation has already happened in the market, adding it has merged its trust for advisers with Spinnaker.
He said: “We’ve been approached by three different master trusts already. They say they don’t think they are going to make it through the next three to six months, ‘could we merge?’ – but we are not interested in a merger with someone who can’t make it for the next six months.”
A spokesperson for TPR said: “In the event a master trust was forced to close, we would work with the pension scheme to ensure that an orderly and timely transition to another scheme was carried out to protect members’ savings and employers using the scheme to meet their duties under auto-enrolment legislation.”