The Pensions Regulator has announced plans to crack down on poorly governed mastertrusts, as auto-enrolment begins to show clear winners and losers among schemes.
The announcement follows plans, revealed in February by economic secretary to the Treasury Harriet Baldwin, to legislate on mastertrusts “as soon as practically possible”.
The mastertrusts that worry me are the smaller ones that might not be so durable
Darren Philp, The People's Pension
The regulator last week announced plans to work with the Institute of Chartered Accountants in England and Wales to revise its mastertrust framework in light of its new defined contribution code, which comes into effect in July 2016.
The regulator’s corporate plan 2016-19 states: “Where we have concerns about the governance and administration of particular mastertrusts, we will engage directly with them to check the skills and experience of their trustees and managers and the sustainability of their business models.”
Growth of the mastertrusts
Mastertrusts have come under increasing scrutiny due to their pivotal role in auto-enrolment. The number of people saving into large DC pension schemes has more than quadrupled since 2009, with sharpening growth following the introduction of auto-enrolment in 2012.
However, at the same time, many smaller mastertrusts were established, which failed to reach the scale of their more successful counterparts and whose members, the regulator now says, “risk becoming trapped in a scheme that attracts insufficient members or assets to be sustainable”.
Alan Morahan, head of DC consulting at consultancy Punter Southall, said the general consensus is that smaller schemes face greater risks, raising questions about “whether the market is big enough for them to end up being viable”.
He added the commonly held solution for the proliferation of schemes is a belief the market will consolidate as providers are acquired and members leave in favour of larger schemes.
“This is something that, globally, regulators are concerned about,” said Morahan. “In the Australian market, there was quite a reduction… over a number of years.”
He also mentioned plans announced this week by the Irish Pensions Authority to cut the number of corporate schemes in the country from 150,000 to just 100.
In addition to a revised framework, the regulator is looking to ensure full compliance with both the requirement to issue a chair’s statement and comply with charge control requirements in the annual scheme return.
It is also looking to proactively engage with the largest 50 per cent of active DC mastertrusts, representing roughly 95 per cent of mastertrust membership.
Lesley Titcomb, chief executive of the regulator, said: “We started our engagement programme with mastertrusts a few months ago. I’m pleased to say our work is progressing well and mastertrusts are engaging with us constructively.”
Darren Philp, director of policy at mastertrust The People’s Pension, said it made sense for the regulator to look to cover as many members with its engagement as possible. He said it would likely end up engaging schemes with strong governance already in place.
“I can see the logic of making sure you have the vast volume of members covered,” he said. “But you’ve got them covered through the mastertrust assurance framework. The mastertrusts that worry me are the smaller ones that might not be so durable.”
He added: “It’s about identifying where the real risks are and responding to those.”
