Spotlight on mastertrust governance intensifies

Expectations are that mastertrusts will grow in terms of both of membership and assets as auto-enrolment beds in.

Data from the Pensions Regulator show multi-employer schemes still make up a small proportion of the pensions industry, accounting for just 380,000 members.

However, concerns have been raised over governance and possible conflicts of interest with these schemes.

The recent OFT investigation into the pensions market questioned the lack of regulatory barriers to entry for such schemes. Equally concerning was the finding that mastertrust trustee boards may not be sufficiently independent.

“Both the Pensions Regulator and some pension providers questioned whether trustees who are paid for and appointed by the provider or adviser will have sufficient ability and motivation to challenge and change the administrator or investment manager from the in-house provider where they are underperforming,” the OFT found.

Morten Nilsson, chief executive officer at Now Pensions, addressed the issue at the Confederation of British Industry’s pensions conference last month.

“One of the things we have criticised is that [in] the other trust arrangements... the only trustee power is that they resign; that isn’t real power,” he said.

Now’s trustee board is made up solely of independent trustees, he added. “The way we have structured it [is] we have a management team which includes everything from administration to investments, that reports into the trustee board.

“They are supervising and monitoring what we are doing, and setting the investment strategy, but they have powers.”

However, Marks & Spencer’s pension manager Julie Parker-Welch supported the idea of provider representation on scheme boards. The retailer uses Legal & General’s mastertrust as its auto-enrolment provider.

“You have to have some administration people on there,” she said. “If they are there and involved in the user group meetings… and there are some large employers giving them an ear-bashing, they understand it.”

Employer involvement

The OFT’s investigation also raised concerns over transparency in operations and over whether employers and members will be able to identify conflicts.

But Sue Pemberton, senior consultant at Buck Consultants, says it is normally very hard for employers to be involved in the detail of the governance.

“There will be the trustees set up, and it will be their job to govern the mastertrust itself. The employers who are participating won’t have much control over that,” she says.

Employers are, however, responsible for ensuring the structure of the governance is effective. Pemberton says they have to look at all the different components – administrators, investment manager, advisers and custodians – and the independence of those elements.

“If [the components] are completely independent of each other, the trustees will find the governance a great deal more straightforward. And if one of those components isn’t performing there is no conflict there for them to remove,” she says.

Jan Burke, head of defined contribution at consultancy Aon Hewitt, says it is very important for employers to be involved in the governance of its chosen mastertrust.

“The mastertrust trustee needs to set strategy that is appropriate for the membership of the scheme. So any input the employer can have to help the trustee understand their members is a good thing,” he says.

When appointing a mastertrust, employers should be looking for documented experience of DC technical knowledge, Burke says. The employer should also investigate whether the trustee has had similar appointments.

Governance committees

A growing number of employers are setting up independent governance committees – much like those in place for group personal pensions – to look at the suitability of the mastertrust for its employees.

Pemberton says: “They will ask them for their governance process and their procedures, and check that they are reasonable and that they are looking at things.”

Employers could ask when the investment range was last reviewed, what changes have been made as a result and how many funds have been removed and replaced.

“But their governance will be more looking at their specific scheme,” she says.

The employer’s governance could also assess whether the scheme’s default is suitable, the money is being invested quickly enough, they are paying the money over in good time, members are receiving accurate correspondence and if the record-keeping is correct.

“It is all the same sort of thing a GPP governance committee will look at,” says Pemberton.

M&S decided to implement a governance committee. Parker-Welch told the CBI delegates: “We get advice on investments and then we go to L&G to show them the advice we have had, and this is what we would like to do. And [L&G] are going to check what we want to do and that we are not totally off our trolley and [doing] something really risky for our members.”

When appointing the mastertrust, one of the key things discussed was the governance and responsibility.

“That user group feeds into the trustees... At the moment, we are working together on what the benefit statement will look like,” she said. “We are working with [trustees] to design something that we think is fit for most people’s understanding.”