Long-anticipated mastertrust legislation was announced in the Queen's speech this week, providing protection for consumers and increased powers for the Pensions Regulator, but details are still sparse.
Proposals for better protections for mastertrust members, capped early exit charges and the creation of two new bodies for public financial guidance were announced in the briefing document that accompanied the speech. They were not mentioned in the speech itself.
Also announced were greater powers for the regulator to authorise and supervise schemes.
In a statement released after the speech, Lesley Titcomb, chief executive at the regulator, said: "We have been calling for a significantly higher bar regarding authorisation and supervision, and we are pleased that today's announcement proposes to give us the power to implement these safeguards."
Ashish Kapur, director of institutional group solutions for Europe at fiduciary manager SEI, speculated the regulator could make the mastertrust assurance framework mandatory, or play a role in approving the creation of new mastertrusts.
"The key is making sure there is a provision for the wind up of a mastertrust, with money put aside," he said.
Select committee
The DWP select committee released a report this month on auto-enrolment, highlighting the main obstacles to the success of the next stage of implementation, including enrolling small businesses, the need for mastertrust regulation and the threat posed by the Lifetime Isa emerging as an alternative to pension saving.
There is a very real danger that ordinary scheme members could lose retirement savings. There is also a risk that faith in auto-enrolment as a whole will be undermined
DWP Select Committee report
Mastertrusts have grown into a crucial part of the auto-enrolment market. The committee’s report states that 94 per cent of employers who chose a trust-based scheme for auto-enrolment opted for a mastertrust. Nearly half of employee enrolments into defined contribution schemes between April 2014 and March 2015 were into mastertrusts.
However, the relatively low barriers for entry in setting up have led to potentially wide discrepancies between different trusts.
The report states: “Gaps in pension law and regulation have allowed potentially unstable mastertrusts onto the market. Should one of these trusts collapse, there is a very real danger that ordinary scheme members could lose retirement savings. There is also a risk that faith in auto-enrolment as a whole will be undermined.”
Solvency risk
The risk is schemes will lack the money needed to continue, placing the assets of their members at risk, said Steve Webb, director of policy at provider Royal London.
“Solvency is an issue here. Small mastertrusts aren’t necessarily [badly run], but if they don’t have scale and can’t afford to operate in the charge cap, what happens? If your money is going into a trust you need some confidence that the trust will be feasible in the medium term.”
He added that the introduction of legislation would not fix the problem immediately. Policy can take time to become law, by which time other challenges may become more pressing.
Webb said: “You have to consult, you have to draft, get it through parliament.”
The Pensions Regulator welcomed the report in a statement: “We agree that TPR’s powers need strengthening to maintain confidence in retirement saving. We want to ensure that consumers are being auto-enrolled into well-run, sustainable schemes, and that we can prevent those which do not meet appropriate standards from posing a risk to consumer trust in the pensions regime.”
Regulatory consolidation
Tom McPhail, head of retirement policy at investment platform provider Hargreaves Lansdown, echoed Webb’s statement about the time needed for legislative change, citing it as a reason the government should introduce policies as soon as possible.
“It can’t be done overnight, but we have to set off as quickly as possible,” he said.
The division of regulation between the regulator and Financial Conduct Authority also needed examining, said McPhail.
“It brings out the question of regulatory consolidation and whether a bipartite structure continues to be an appropriate model. The argument is strengthening to roll them together.”
He added: "We need fewer schemes in the UK and a better-resourced regulator to monitor the schemes we have left."
