Mastertrust discontinuance plans – why we need certainty

In the past, very few pension schemes operated as mastertrusts. Those that did tended to operate within specific industry groups, such as merchant seamen, charities and even solicitors.

Those industry-wide schemes that provided defined benefits have had difficult times and there have been numerous, lengthy court cases to clarify where responsibility for funding deficits lies. 

New breed

More recently, the advent of auto-enrolment has led to a new breed of mastertrust being established. 

These operate on a defined contribution-only basis and are designed primarily for employers looking to meet their auto-enrolment obligations. There are now estimated to be more than 80 new-style mastertrusts competing for business. 

Whether a mastertrust is established for commercial purposes or on a not-for-profit basis, the financial costs of entry into the market are considerable.

Not only are there the usual costs of establishment, but also the sponsor is going to have to shoulder excess operating costs during the early years to the extent that they exceed charges recoverable from members’ retirement pots. 

The business plans for all sponsors must be to reach a critical mass of funds under management so that charges deducted from members more than cover operating costs. 

The introduction of charge capping together with the low level of retirement savings means reaching critical mass could be a long haul.

The costs of winding up a mastertrust and distributing its assets should not be underestimated and in most cases are likely to have to be met from the members' own retirement savings

It is inevitable that not all mastertrusts will reach this critical mass and some sponsors will cut their losses by withdrawing support and terminating their trust.

The costs of winding up a mastertrust and distributing its assets should not be underestimated, and in most cases are likely to have to be met from the members’ own retirement savings.

Potentially, members with only auto-enrolment funds could see all or most of their pots used up in administration expenses. 

We have been in a similar situation before when in the early 2000s a number of underfunded DB schemes wound up, unable to secure members’ promised benefits.

Ros Altmann, now pensions minister, was at that time instrumental in getting the law changed so solvent employers could not abandon their DB schemes.

In addition, the Financial Assistance Scheme and the Pension Protection Fund were created.

To date, regulatory attention for DC mastertrusts has focused on the important issues of ensuring independence and good governance. 

These are sensible provisions for ongoing schemes, but there is currently no obligation on those who sponsor mastertrusts to provide for potential discontinuance costs.   

The independent assurance framework for mastertrusts developed by the Institute of Chartered Accountants recognises the potential problem, and requires mastertrusts seeking an assurance report to adopt formal discontinuance plans that address how members’ savings are to be safeguarded in the event of it failing.

However, compliance with this assurance framework is voluntary, and recent press reports suggest, disappointingly, only a handful have so far obtained assurance reports. 

Unless, and until, legislation requires mastertrusts to adopt discontinuance plans, members will be at risk that on a wind up of the trust, administration costs would have to be deducted from their savings. 

If action is not taken, in a few years’ time we may again see photographs in the press of naked pensioners protesting outside political party conferences about how they were robbed of their retirement savings by a mastertrust wind-up, and no one wants to see that.

Duncan Buchanan is president of the Society of Pension Professionals and partner at Hogan Lovells