Matt Pridding discusses new plans by the pensions regulator to secure master trusts.
Last month The Pensions Regulator (TPR) announced that looking at the quality and sustainability of master trusts was one of the top priorities in its corporate plan.
It also stated that 55% of members are in the four largest master trusts and that there are also 69 other smaller master trusts.
TPR is concerned that these smaller master trusts may have poorer governance and member communications than the larger master trusts, and may not benefit from economies of scale.
This has raised fears for these smaller master trusts that they may be more prone to failure and that if the sponsor fails or withdraws from the market, members' funds could be lost. Member funds can be used during a scheme wind up to cover the costs.
There is also no cap on this, so members could potentially lose everything. This is not to say that the larger master trusts are too big to fail, and a sponsor failing for one of the larger master trusts would affect significantly more people.
As master trusts are used to support a significant proportion of auto enrolment, any failure could lead to a large loss of consumer confidence in the workplace pension system as a whole.
TPR has floated the idea of a 'living will' which would lay out a plan for what would happen with members benefits should a sponsoring employer fail or withdraw from the market.
Whilst having a plan in place for the discontinuance of a master trust is important, the trustees should include a range of options that allow them to make the most appropriate decisions at the time and in the best interest of the members should the worst happen. Any living will or discontinuance plan should also align with the scheme's trust deed and rules.
As well as living wills, TPR has also suggested further supervision, capital requirements and having a licensing system in order to increase the security across the master trust market. Currently, master trusts can work towards the Pensions Quality Mark (PQM) as well as the master trust specific 'master trust assurance', which TPR developed with ICAEW (Institute of Chartered Accountants in England and Wales).
Increasingly, larger master trusts are looking to gain AAF 02/07 accreditation in order to show the market place that they are of high quality and offer excellent governance standards.
There are numerous areas in relation to master trusts that have question marks beside them, but it should not be forgotten that a well-run master trust allows multiple employers to have access to high quality investment and administration services at a low cost, alongside a high quality governance structure.
With master trusts now established in the market and TPR's increased focus on them, it is a key time in their development and regulation, especially for the smaller players.
These in particular can take heart from my hometown club of Leicester City, which has shown recently that biggest is not necessarily best.
Written by Matt Pridding, Manager, PTL.
