Fiona Matthews: Time for the regulators to nudge master trust consolidation

Fiona Matthews 2

There are simple steps policymakers can take to quickly improve oversight of master trusts, says Fiona Matthews, managing director of Willis Towers Watson’s LifeSight master trust

Since the introduction of auto-enrolment in 2012, master trusts have multiplied. There are nowmore than 70 available to help people access their pensions.

Master trusts can help meet a variety of needs, not just AE. These include outsourcing, discharging legacy DC trust-based plans into sound arrangements and, as an at-retirement partner, offering flexible drawdown and UFPLS solutions for single employer trusts.

While more employers are wanting to outsource their pension provision, TPR has expressed concern around the master trust market and the safeguards it offers to members.

The recent Queen’s Speech made it clear that changes were coming that would impact the route to entry to the market, beefing up TPR’s powers. One key aim may be to dispel fears that members’ funds could be used to meet the costs of winding up an insolvent master trust and transferring members’ savings to a new provider. This is a particular concern where the master trust is not supported by a profitable enterprise with diverse lines of business and a reputation to protect.

As well as the ability to look after ongoing compliance requirements, a high-quality master trust provider has scale and expertise that mean it may be better equipped to tackle the challenges of improving member outcomes, communicating and demystifying complex issues, and helping members better understand their choices.

Governance standards could be improved at a stroke by mandating all master trusts to obtain the Master Trust Assurance Framework accreditation developed by TPR and the ICEAW. While industry-recognised accreditations require major investment, they would go a long way to promoting best practice around charges, governance and communications, as well as highlighting that the pensions industry is reputable and trustworthy.

This accreditation includes the requirement to have a discontinuance plan, and perhaps it will be toughened further by ensuring it includes resources for trustees.  Similarly, TPR chief Lesley Titcomb has talked of her desire for a solvency requirement for master trusts. Note here that, if the master trust provider is a well-established profitable enterprise with diverse lines of business, geographies and clients, it is unlikely to hang out to dry a failed master trust. Its reputation would suffer if it did not put the master trust to bed in a way that kept members’ savings safe.

Most UK master trusts invest members’ assets via an insurance policy. This means assets are segregated from the investment manager and held with a custodian, protecting members from the investment manager’s failure. Should the insurer itself fail, most arrangements should be covered by the Financial Services Compensation Scheme.

There will be variation between master trusts, and employers looking to select one should determine what protections are in place. Generally, however, we do not expect much difference in this respect between the FCA-regulated offerings from insurers, contract-based schemes and most other offerings.

Employers should exercise caution when selecting a partner to provide their pension but, if they perform robust due diligence, they should be able to outsource their pension provision with confidence.

The much anticipated consolidation in the UK master trust market may solve many legitimate concerns of smaller enterprises over the security of member assets. In the meantime, however, what should the regulator and policymakers do?

TPR should set up a process to approve the creation of new schemes, and require compulsory MTAF accreditation before new business can be taken on, with existing players required to comply within 12 months or close. TPR and the FCA should also look to quietly direct market consolidation for non-compliant master trusts.

Meanwhile, master trusts that lack FSCS protection or a government-backed guarantee should be required to obtain insurance. As long as we, as an industry, continuously look for ways to make master trusts more robust, employers will benefit from high-quality, lower-risk, market-competitive pension provision.