Calls for tougher regulation as mastertrusts grow

Earlier this year, the government published a consultation on its regulatory approach for defined contribution pension schemes.

This included its concerns about the rapid rate at which mastertrusts have entered the market and potential governance issues from significant membership growth, conflicts of interest and questions over independence.

One of the biggest surprises about auto-enrolment has been how quickly mastertrusts have appeared, said Brian Henderson, UK head of DC at Mercer. But he warned this growth could have a downside for members, including possible conflicts of interest. 

Independent providers may be more willing to hire and fire managers, he said. "Some mastertrusts won’t – or they have the ability to do it, but you could challenge whether they would hire and fire their own companies."

The Pensions Regulator should look into the safeguards these multi-employer schemes have in place, Henderson said, adding that they should operate like any trust and abide by the regulator's rules.

Improving standards

According to the regulator, as of January there were 50 operating mastertrusts, with the number of members in these set-ups expected to increase significantly as auto-enrolment continues.

Jeremy Goodwin, pensions partner at Eversheds, said mastertrusts have been a positive addition because they have shaken up the marketplace – but he stressed the need for guidance, as these schemes have created unique governance issues.

"It is important that the regulator responds to these quickly by producing bespoke guidance on governance," he said.

“Given the potential scale of these mastertrusts it is essential that they are run to the highest standards of governance, and it is essential that people can have confidence in these arrangements."

Since the launch of auto-enrolment, the quality of governance at mastertrusts and the benefits they bring has been much discussed by the industry.

Last month, Dr Debbie Harrison, senior visiting fellow at the Pensions Institute, Cass Business School, urged the regulator to quickly “sort out what mastertrusts are” and how they are regulated.

Despite its concerns, the regulator has said the arrangements have the potential to deliver good outcomes through good governance and economies of scale.

Some of the major mastertrusts on the market, like the National Employment Savings Trust, have focused on improving their governance structures.

Graham Vidler, director of communications and engagement for Nest, said good governance is critical in ensuring there is faith in pensions.

“On a practical level this means having good internal structures in place with independent oversight, and ensuring you comply with industry guidelines, such as the [regulator's] six principles for good defined contribution schemes,” he said.

Competitor The People’s Pension, provided by benefits company B&CE, also sought to have a strong focus on governance.

"We appointed a professional independent trusteeship, with industry experts that understand the subject matter, and we believe this approach provides for the best member outcome," said Paul Murphy, director of corporate development at B&CE.