Bill McKenzie on why it’s time to build trust in Master Trusts
The success of auto-enrolment – originally legislated for by a Labour government – has generated a new style of pension scheme. Those that are a defined contribution, operated on a trust basis and which have more than one employer. Currently, there are more than eighty such arrangements with over 4 million members and £8.1bn worth of assets. And this is set to grow, as auto-enrolment proceeds apace.
There is nothing wrong with this of course, as these ‘Master Trusts’ provide a potentially efficient, low cost vehicle for savings and should be encouraged. The problem however, is that they are not properly regulated – and certainly not to the standard of contract-based pensions.
Master Trusts also do not require a licence to operate, and there are limited barriers to market entry, no ‘fit and proper person test’ or requirement for specialised trustees. Plus no infrastructure in place to support a wind up of a failed trust. Some operate on a profit basis scale, which is unprecedented in occupational pensions. This is an environment where trust failures are waiting to happen, and where members and employer contributions are at risk.
That is why we support the government’s proposal to regulate such trusts and give the Pensions Regulator the power to authorise how such schemes to operate. This requires making sure that key people – trustees, scheme funders, promoters – are fit and proper, that the scheme is appropriately funded and has a sound business plan, and effective systems and processes. Crucially, there is the requirement to ensure members interests are protected during certain ‘trigger events’ – for example, insolvency, the scheme funder walking away, or a decision to wind it up.
The Bill that gets its Second Reading in the House of Lords today applies to existing Master Trusts as well as new ones. It also includes proposals for retrospective protection for members’ funds, should some choose to leave the market place and pre-empt the regulatory regime. Indeed, there is likely to be some consolidation in the market and this will be no bad thing.
Proper regulation of Master Trusts is overdue – to protect members from suffering financial detriment but also to promote sustainability and confidence in pensions more generally. Too much has occurred recently that works in the opposite direction.
In particular, the debacle of the secondary annuity market where government at first proposed that existing annuity holders should be able to sell that income stream without tax penalty but then scrapped the idea, recognising as they were had been told beforehand that the scheme would not fly.
In addition to this, there has been a change of heart on how the pensions guidance service should operate – a facility which is vital to the success of pensions freedom. The BHS pensions’ scandal remains unresolved, with questions over the power of the regulator and a willingness to use them. We have the continuing sense of grievance of the WASPI women, who believe they have had inadequate notes of their state pension entitlement changes. Plus the acknowledged poor communication around the introduction of the simple state pension.
And although auto-enrolment has been a success, and an example of good pension policy making, its reach is not as extensive as we would like. Over 5 million people are ineligible – an injustice we should address at next year’s review.
Taken together, all of this is a clear argument for the need to make a success of regulating Master Trusts, to head off any scandals that would otherwise germinate in the existing light touch regulation. That is why Labour Peers will play our part in delivering the change.
Lord Bill McKenzie of Luton is Shadow Pensions Minister in the House of Lords
Published 1st November 2016