Stranded in a failed mastertrust

From April 2019, mastertrusts will not be able to operate unless they have been authorised by the Pensions Regulator.

Despite the recently announced reduction in the registration fee to £41,000, a number of mastertrust sponsors will likely throw in the towel and decide to exit from the market. Others may find their applications to the regulator for authorisation declined.

The size of pot and issues with data, coupled with the number and nature of the sponsoring employer base, may mean  a bulk transfer is not possible. How then will the trustees complete their obligation to wind up?

Mastertrusts that are unauthorised must wind up and the trustees will need to find a new home for their members' retirement pots.

Mastertrust books aren't always attractive

Traditionally, trustees of occupational defined contribution pension schemes in wind-up would arrange for an insurance company to take over members' pots and issue them with "section 32 policies".

However, even in the largest mastertrusts, average member pots are often below £500, and insurers are unlikely to be queuing up to issue policies.  

Finding an authorised mastertrust prepared to accept a bulk transfer of members is another way for the trustees to discharge their obligations.

To an extent, this exit process has already begun, and there have been a number of publicised mergers of mastertrusts, but not all failed mastertrusts will be attractive to larger peers.

The size of pot and issues with data, coupled with the number and nature of the sponsoring employer base, may mean a bulk transfer is not possible.  How then will the trustees complete their obligation to wind up?

Lump sums will not fly

Tax rules permit payments of winding up lump sums (up to £18,000), and at first sight it could be attractive to trustees to cash out members and pay them a lump sum.

But, this would be contrary to the aims of auto-enrolment and any members still working for the same employer could face punitive tax charges.  

There needs to be a way in which trustees of failed mastertrusts can discharge their obligations where other schemes are unwilling to accept a bulk transfer.

One option would be for Nest to be the receiving scheme of last resort. Alternatively, the tax rules could be relaxed to allow for a wind-up lump sum of below, say, £3,000, so there are no punitive tax charges for those who remain as employees.  

AE's reputation is at stake

If a solution is not found, members could be stranded in a failed mastertrust where the trustees have no option but to continue to operate the scheme for an extended period.

The issue then is who meets the costs? It is likely that the original sponsor will be a limited company, which may well wind up.

Participating employers are unlikely to step forward to foot the bill, although they should check the wording of the trust deed.

That leaves members’ meagre pots as the only source of funds to meet expenses – not a good advertisement for the pensions industry, nor auto-enrolment.

Duncan Buchanan is a partner, Nicola Rondel is counsel, both in the pensions practice at law firm Hogan Lovells.