By Dale Critchley, Technical Reform Manager, Workplace Benefits Aviva UK Life
Master Trust’s increase in prominence has been driven by the attraction of an expanding automatic enrolment market, at a time when some advisers have sought to diversify their income stream.
The attractiveness of the Master Trust market has been amplified by the relatively low barriers to entry. Unlike setting up a group personal pension there is no requirement for oversight by the FCA or the PRA and no Solvency II rules to adhere to.
The greatest risks to member benefits probably stem from an overoptimistic sponsor. The ever increasing size of the loan to NEST is evidence of the overhead imposed on new entrants to the DC pensions market.
The trustees of a Master Trust have a duty to examine the sponsor’s business plan and they should be aware of the protection afforded to scheme assets in the event of the failure, but judging potential market share based on a proposition plan and some projections is not easy. The result is a risk that the sponsor fails, and the scheme has to be wound up.
The trust deed and rules may allow member funds to be reduced to pay for the wind up as a last resort, and there lies the problem. With limited funds in a new Master Trust, at least minimum costs of wind up and no sponsor around to pay the bill, member assets could be depleted. A personal disaster for those members impacted who could lose their retirement fund, but also a problem for the reputation of Master trust and pensions in general.
The possible solutions are multiple, but they boil down to the introduction of sensible barriers to entry, funding to cover the cost of wind up and good governance of assets, in investments that offer a level of protection in the worst case scenario.
A fit and proper persons test seems sensible but it is the provision of a fund to cover wind up costs that is attracting most attention. Should this be a DC extension of the pension protection fund i.e. a risk based levy, a capital amount deposited with the trustees, a promise or an insurance. Each have their advantages but all need to overcome the issue that schemes could fail early and that those in the best position to contribute to any fund are those secure Master Trusts whose members are least likely to need protecting.
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