Master trusts have become the go-to workplace pension solution for the majority of employers and advisers alike, looking to ensure compliance with auto-enrolment, with 60% of all employers that have staged so far using one, according to NOW: Pensions.
With so much of the nation’s savings tied up in these schemes, it is not surprising that they have come under increasing scrutiny, and have been unfavourably compared to contract-based schemes.
There have been claims of low barriers to entry and inferior regulation, and these have led the government to consider legislation that tightens up regulation.
While some of the criticism is unfair, action needs to be taken to improve the image and quality of the master trust market. Being aware of these should help advisers and employers take greater responsibility from the outset.
Many of the more uncomplimentary headlines have homed in on the Master Trust Assurance Framework AAF 02/07 (MAF), which was developed by The Pensions Regulator (TPR) and the accountancy body ICAEW to improve the standards of regulation within a scheme.
While it is voluntary, in practice, any master trust which wants to be taken seriously by its clients and peers needs to be able to demonstrate accreditation. In recent weeks, there have been calls to make this mandatory and we would wholeheartedly back these demands.
We also believe that TPR needs to do more to help business advisers and employers to source a quality workplace pension.
After all, both the significant expense of gaining AAF 02/07 – which can cost upwards of £100,000 once audit and due diligence have been completed – and the higher standards which these firms are held to, should help to ensure that the best interests of members are met.
Built to last
It is important to remember that the master trusts which will still be around at the end of this decade have a robust, long-term strategy at their heart, as well as strong administrative and governance capabilities.
Those who are not willing to take on the expense of accreditation should not be in the market in the first place. Such opportunistic providers will not appear on the central list of TPR accredited workplace pensions.
It should also be noted that no such similar accreditation exists in the contract pension scheme world which once dominated the occupational defined contribution landscape.
Group personal pensions are run by the provider, for the provider and have only recently been subject to independent governance committees (IGC). Even when an IGC reports, the provider is not bound to act on recommendations.
But MAF accreditation is not the whole story. There are some surprising shortcomings in how performance on the default funds used by pension schemes is reported.
The performance of these underlying funds should be a key factor in deciding which scheme to choose.
Despite this, there is currently no data on the best and worst performing default funds – publishing data should also be a mandatory feature of any quality workplace pension.
Publishing would lead to increased focus on fund performance, which is, of course, pivotal to the successful implementation of any retirement strategy.
Another difficulty associated with auto-enrolment compliance is that some schemes are perceived to ‘pick and choose’ who they accept based on the number of members and their assets.
Reassurance
This has led to a feeling of uncertainty in the market and many firms may still not be aware that they are likely to have to shop around before they can find a scheme that will accept them. To assist them, the regulator can and should provide peace of mind to employers by publishing a list of all those schemes which are open to all employers.
Finally, there is the subject of trustees. This is another area which is set to be covered in the new legislation proposed by the government and rightly so: the quality of a master trust’s trustees is vital to the integrity and smooth running of a fund.
At present, a master trust is required to have at least three trustees, of which two must be independent.
This can be a costly business: trustees in this field will contract with a reputable provider for a starting fee of £20,000 to £30,000 per annum for the chairman and smaller annual sums for the independent members.
However, despite the expense, the master trusts who use reputable trustees demonstrate a commitment to the best interests of their members.
There is much going on in this fast-changing market, with the recent DWP inquiry into auto-enrolment and plans to legislate on master trusts, which will help set the tone for the master trust space.
In the meantime, an awareness of the steps set out above should help ensure that employers and business advisers are well-positioned for a smooth transition into auto-enrolment.
Graham Peacock is managing director at Salvus Master Trust
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