The importance of having a provider that can ensure security
With the recent rise in the popularity of master trusts has come some uncertainty for employers, especially in terms of how master trusts work and how safe they are for members. In recent months, we observed an increasing emphasis being placed on the security of these multi-employer pension arrangements. For example, The Pensions Regulator (tPR) last month stated that ‘gaps in pension law and regulation have allowed potentially unstable master trusts on to the market’. The Queen’s speech, soon after, made it clear that steps are to be taken to address these concerns.
For businesses, this means that understanding the security of a master trust scheme is essential. Thankfully most master trusts should not give cause for concern. Below, I discuss, the ways in which many providers are ensuring the security of their schemes and outline the steps that may be taken through the anticipated Pensions Bill to improve the safety of all schemes in the market and ensure minimal impact on the member.
Protection of member assets
The majority of master trusts invest members’ assets via a custodian or an insurance policy. Typically, this means their assets are segregated from investment managers offering security in the event of the failure of the investment manager. Should the insurer who issued the policy fail, then such arrangements are typically covered by the Financial Services Compensation Scheme (FSCS).
Coping with potential failure of the sponsor or the master trust
Members concerns around the safety of a master trust is best understood by thinking about what would happen if the sponsor or the trust itself failed. Although, for many, this scenario is highly unlikely due to the types of sponsor and reputational risk associated with letting their master trust fail. In the unlikely event that such circumstances were to arise, a large master trust would typically have the resources to find another provider willing to take over.
If a provider has insufficient resources to support a master trust failure, whilst not desirable, members should still typically not have to dig deep into their pension’s pot. For example, imagine that a master trust had 50,000 members, with an average pot size of £10,000, giving £500 million of assets. In the event of the fund failing, the trustee could then raise £250,000 by levying a one-off charge of 0.05% of each member’s fund, averaging £5 per head. That sort of money would go a long way towards covering the trustees’ costs as they move forward with finding an alternative provider to take responsibility for members’ savings. If a smaller master trust failed then the charges could be more onerous per person. In this respect size does matter.
The safety concerns of employers and organisations should therefore focus on who they are considering when selecting a partner to provide their pension scheme. By identifying a secure, established, provider of a master trust, there should be minimal concern about outsourcing their pension provision. A provider should be able to assure employers that members’ funds are safe and have an independent board of trustee with a wide range of skills that sets them apart.
Steps to improve the safety of schemes
It is likely that we will see consolidation of the UK master trust market in the coming years as regulation increases and the market settles. The recent Queen’s speech has made it clear that legislative changes are coming that will impact a potential new provider’s entry to the market, with further details to follow. Regulators and policy makers will need to set out guidelines and regulations that will take into consideration aspects such as the size of the trust and identify the security of the providers backing them.
Additionally, governance standards are constantly being improved. One way to ensure all master trusts are compliant would be to mandate all to obtain the Master Trust Assurance Framework accreditation that has been developed by tPR and the ICEAW. This framework includes the requirement to have a discontinuance plan and assurances of security of the trustee’s themselves. A solvency requirement for master trusts has been widely mooted. This would require legislation and needs to avoid putting onerous obligations where there is little or no risk for the member, understanding that members in the end will be picking up the tab.
For now, pension managers and HR directors should be focused on finding a master trust that has the correct structure in place to offer the members security and protection. By bringing scale to ensure low costs to members and strong member communication and engagement tools, allied to professional governance standards, established master trusts are likely to provide better solutions than all but the most committed single employer trust arrangements.