Jeannie Drake on the government's failure to properly protect millions of people saving for their retirement
Master trust pension schemes are an important part of the workplace pension system. If regulated well, they allow trustees to look after members’ interests, create scale and provide access to savings products at low cost.
These trusts have grown rapidly while inadequately regulated, from a fifth of a million contributing members in 2010 to well over four million today. This is expected to rise to seven million come 2030—billions of pounds from millions of workers. And few have anticipated just how quickly the structure of master trusts would evolve.
Low barriers meant that market entrants set up trusts on minimal requirements, into which people were auto-enrolled before an optimal defined contribution proposition and market structure were put in place. The NOW pensions master trust CEO, Morten Nilsson, was shocked at how easy it was to set up a master trust, as it merely involved sending a form to HMRC and the Pensions Regulator.
The trusts expose members to specific areas of risk. They can introduce a profit motive into a trust arrangement, but fall outside FCA regulation. A master trust set up by a provider raises concerns about the independence of trustees. Currently, if a trust fails the costs of winding up are met from members’ savings.
The government’s Pensions Bill, which has its Lords Report stage this week, introduces a new authorisation, supervision and resolution regime for master trusts. (Many also expect the Pensions Regulator to push for greater consolidation among the 80 or so existing trusts.)
A key purpose of the Bill is to protect the pension savings pots of ordinary people from being raided and run down in the event of a master trust scheme failing. At present, the considerable costs of wind up, when members and their benefits are transferred to another scheme, are met by raising charges on those same people. This, in effect, drains their personal pension pots.
The Bill places a capital adequacy requirement on master trusts to have available sufficient resources in the event of a scheme failing, to meet the costs of wind up and transfers. Ministers argue that in the event of such failure, the new capital adequacy and transfer regime will always work. But new regulation to be applied by the Pensions Regulator, while welcome, cannot guarantee the financial resources that might be needed.
So Labour’s amendment to the Bill, which we are preparing to press to a vote, would require the Secretary of State to make provision for a ‘funder of last resort’ in instances of scheme failure where the master trust has insufficient resources to meet the costs. Without such a provision, the government cannot claim – as the Lords DWP Minister did at Second Reading – that from the day it becomes law, the Bill will protect members’ pots.
Millions of people doing the right thing, saving for retirement need the unqualified security of knowing that should their master trust pension scheme fail and have to be wound up, their savings will not be raided to pay the costs of that sorting out that failure. The government should act now, and help deliver a genuine guarantee of protection.
Baroness Jeannie Drake is a Labour Peer and a board member of the Pensions Advisory Service
Published 18th December 2016