Treasury to legislate against master trust proliferation

Harriet BaldwinRules surrounding the operation of master trusts will be tightened up by new legislation announced by Treasury Minister Harriett Baldwin yesterday.

Baldwin said the Government had considered bringing in tighter requirements on master trusts within current legislation passing through Parliament but had not had time.

Speaking in the House of Commons yesterday Baldwin said: “The Government will bring in legislation on master trusts … as soon as practically possible. We had considered bringing it in as part of this piece of legislation, but we felt that since the Bill had gone through the House of Lords it would be very late on in the legislative process to introduce something as extensive as that. However, we aspire to find very soon the first appropriate vehicle that could be scrutinised by both Chambers to bring in the regulations relating to master trusts and auto-enrolment”

The move follows growing concerns over the proliferation of smaller master trusts, with more than 70 believed to be currently in existence.

Royal London director of policy Steve Webb says: “It is good news that the Government is planning to tighten the rules on the dozens of master trusts that are springing up.    Reports of potential conflicts of interest, poor governance and financial instability among small new master trusts are a source of grave concern.   

“When workers are automatically enrolled they need to be absolutely confident that their employer has chosen a reputable and financially secure provider.   It would hugely damage the reputation of automatic enrolment if workers started to be enrolled into poorly governed schemes.   We look forward to an early announcement of the Government’s timetable for action, as the risk remains a real one until the rules are tightened”.

Scottish Widows head of industry development Peter Glancy says: “Our concerns are not in relation to the concept itself, but in relation to the lack of an appropriate regulatory and legal framework to protect savers whose money is handed over to operators by their employers. Trust Law is an appropriate basis of governance when a pension scheme exists solely for the benefit of its members. Traditional Occupational Pension Schemes operate in this way, as does the Government Scheme Nest and The People’s Pension.

“However, the vast majority of master trusts have been set up by operators who have a profit motive. Traditionally financial services firms operating with a profit motive have been supervised by the FCA who have a remit to ensure that the balance between commercial returns and customer returns are fair, conducts due diligence on senior management and ensures that the market operates in the best interests of customers. Master trusts are not supervised by the FCA and this regulatory gap means that many people will be exposed.

“Traditional pension providers are also supervised by the Prudential Regulatory Authority (PRA) which sits within the Bank of England. The PRA ensure that firms have appropriate levels of capital and operational infrastructure to operate a sustainable business in the long term. Master Trusts are not subject to this scrutiny and supervision and there is a real risk that many Master Trusts will not be sustainable in the long term. The question then arises as to who picks up the costs of sorting things out if the master trust you are invested in fails. As contract law doesn’t apply here it could become very complicated and in the absence of a robust regulatory framework, savers could end up having some or all of their pension pot allocated to covering the administrative costs that arise.

Sackers head of defined contribution Helen Ball says: “Master trusts are likely to play a central role in the effectiveness of the Government’s automatic enrolment policy, and we therefore welcome confirmation of the Government’s view of their importance.

“It will be interesting to see how those drafting the new legislation will strike a balance between consumer protection – which is crucial – and the practical challenges faced by master trusts of significant scale. In an ideal world, the final rules will protect members against weak or fraudulent trusts but avoid stifling high quality and innovative arrangements.”