Government urged to pick up the pieces of failing mastertrusts
The mastertrust legislation horse is being put before the cart now that the pension schemes bill has reached the House of Commons, as the debate is shifting to who will be the 'funder of last resort'.
Growing concern over the viability of smaller mastertrusts and safety of members’ pots brought into focus the absence of a clear legislative framework for the vehicles; this is now remedied (five years after the start of auto-enrolment) with the pension schemes bill.
Why the government? Because it’s their policy foul-ups that have allowed the proliferation of unsustainable mastertrusts
The bill was passed to the House of Commons – where it will be debated on January 30 – last week, with an amendment requiring a so-called ‘funder of last resort’ to cover the cost of a wind-up should a mastertrust have insufficient capital.
Many in the industry are in support of the mechanism, although who will pay for it is yet to be decided. While mastertrusts themselves are calling for government to be that last resort funder, most agree this is unlikely to be the case.
Former pensions minister Ros Altmann said the fact no one had thought to put in place a safety net for failing mastertrusts and protection for member money before they were allowed to operate was “an outrage”.
Altmann said she doubted the government's willingness to spend money on any tail risk insurance mechanism, “but they don’t want to spend anything on anything, so it’s a question of what happens next”.
Mechanism should be time-limited
Richard Butcher, managing director of professional trustee company PTL and chair of the Standard Life Master Trust, agreed a funder of last resort is needed.
TPR pause button could leave members without accrual
Powers contained in the bill for the Pensions Regulator to issue pause orders – for which the bill does not specify a time limit – mean members could be left without pension contributions for an uncertain period of time.
“That one is a massive, ridiculous problem, which we cannot surely allow to stand in the bill,” former pensions minister Ros Altmann, who had highlighted the issue in the House of Lords, said.
“What that pause order will mean is that members’ pension rights are completely undone.”
Instead of ceasing accruals, Altmann said, “there needs to be an… account set up where employer and employee contributions are paid – even if it’s kept in cash for a bit that’s not the end of the world – while the pause order is going”.
Richard Butcher, managing director of trustee company PTL, said the pause order was a sensible tool but should be used in “quite a restricted number of circumstances, and it should be very closely time-limited”.
He said if a mastertrust sponsor fails to come up with a solution within two or three months “then arguably they shouldn’t be in the game anyway”.
He said this should be government-funded “because it’s their policy foul-ups that have allowed the proliferation of unsustainable mastertrusts”.
Butcher also noted that as capital adequacy measures are applied to new mastertrusts and phased in for existing ones, the support mechanism should be temporary, in the way the Financial Assistance Scheme was for defined benefit schemes.
“That’s exactly what we need here, we need a time-limited support mechanism funded by the government.”
Industry levy would be 'unfair'
However, Butcher said he is not hopeful this will happen. Instead there could be a levy on employers as “it’s those employers who chose the down-and-dirty mastertrust for whatever reason”, therefore failing in their due diligence.
He said if, however, the industry has to contribute, the system will be inherently unfair. “Make no mistake: if the industry has to put their hand in their pocket, the parties that will be putting their hand in their pocket are the well-run mastertrusts, not the poorly run mastertrusts, because they haven’t got the capital.”
Although well-run trusts would in that case have to make up for the failings of government and employers, “the argument for mastertrusts to pay it is 'you’ve all got skin in the game'. If there’s a disorderly trust failure it affects all of the mastertrusts’ reputation, whether that’s fair or not.”
No need for a funder of last resort?
But others dispute the need for a funder of last resort. Mark Futcher, partner in consultancy Barnett Waddingham, said its implementation could be “overly costly and overly complicated”.
The issue with defined contribution, he said, is not an ongoing funding problem. “Whenever you get involved in wind-ups the real cost is actually where there is poor-quality data,” he said, but added that national insurance numbers could be used to track down members.
Futcher said the Pensions Regulator could put in place a panel of backstop schemes that bid to pick up members of failing trusts, who would be identified through their NI numbers.
“There are alternative systems and commercial systems rather than having to build a PPF-style scheme within DC.”