Personal Pension  

Looming spectre of master trust ’zombie’ schemes

Looming spectre of master trust ’zombie’ schemes

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 at First Actuarial.

One trust has been approached by three rivals seeking mergers amid fears they will not survive the next three to six months.

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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 will 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 told FTAdviser 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 73 master trusts exist - multi-employer occupational pension schemes of various sizes run by trustees making decisions on investment and service providers.

Yesterday, MPs on the work and pensions select committee called for an overhaul of regulation governing master trusts, highlighting “major concerns”.

Earlier this month, Frank Field, chairman of the committee, wrote to George Osborne requesting new pension legislation be brought forward. His letter suggested gaps in regulation have allowed potentially unstable master trusts onto the market.

Jade Murray, partner at Aldeshaw Goddard, outlined a case where the Pension Regulator 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.

“Consolidation is probably a good thing - it would mean cheaper costs and better outcomes for members.”

Duncan Buchanan, partner at Hogan Lovells said there is “a significant risk” a lack of consolidation could lead to zombie schemes.

They need “critical mass” to survive, he said, adding winding up failed schemes is complicated and costly. “The only places those costs can come from are members retirement accounts.TPR is aware of these concerns.”

John Reeve, senior consultant at Premier Pensions Management, said where mergers are arranged these would be financed by the ceding or receiving providers, not members.

“But if a provider goes out of business with a defined contribution master trust still in place then the situation is far more complex.

“In this case I hope someone will come to the rescue of the members and pay for a merger. It would be very bad for the public confidence in pensions generally and in master trusts if members were to lose out.”