Warning of risk to employees’ workplace pension investments from ‘unstable’ master trusts

15th May 2016


Unstable and poorly financed pension plans could be putting thousands of employees’ workplace pension savings at risk an influential committee of MPs has warned.

The committee has singled out pension arrangements known as master trusts for criticism. Although many master trust plans have strong financial backing and are offered by long established pension companies, the MPs are concerned that others have set up without sufficient financial support.

The MPs want this addressed in a new pension bill. The committee is also worried that contract-based schemes which come under the supervision of the Financial Conduct Authority may face a tougher set of rules than that trust pensions which fall under The Pension Regulator.

The committee has called for new minimum financial and governance standards for new master trusts entering the market. It wants a new set of ongoing requirements for master trust schemes. It says a new voluntary code, which allows master trusts to gain membership of an approved list held by the TPR, should perhaps become mandatory.

The report adds that overall the workplace pension reforms have been a “tremendous success” with an additional 6.1 million people enrolled in a workplace pension and saving for their retirement. Employer compliance rates – they must offer a pension – are high and employee opt-out rates are low.

But the committee says gaps in pension regulation have allowed potentially unstable master trusts on to the market, and employers may have unwittingly put their scheme members at risk of losing their retirement savings.

The committee says there is also not enough clarity about employers’ liability if one of these master trusts were to collapse, or if any chosen pension fund fails. There is also a risk that wider faith in auto-enrolment and the impressive gains in retirement savings will be undermined.

The committee also raises the concern that the new lifetime Isa could distract from auto-enrolment, with employees potentially opting out of their workplace scheme to put savings into a Lisa. The Lisa is being introduced at a time when the majority of small businesses are still to be brought into the auto-enrolment system and statutory contribution rates are yet to rise.

While the returns on the Lisa appear attractive, as is the fact that it can be put towards the purchase of a home, in the long term, the committee argues, it would leave people worse off. It says Government has been sending mixed messages about the best way to save for retirement and should conduct urgent research on any effect of the Lisa on auto-enrolment and report on this before the 2016 Autumn Statement.

Frank Field MP, chair of the committee, says: “Auto-enrolment has been a tremendous success that will ultimately see approximately 9 million people newly saving, or saving more, in a pension. Crucially now we must do much more to ensure that people’s savings are put in the best possible place, and are secure.  To this end, we greatly look forward to seeing a Pension Bill in the Queen’s Speech this week. This is what we and others have been calling for.”

Tom McPhail, Hargreave Lansdown head of retirement policy says: “Looking after individuals’ retirement savings is a responsibility which demands robust safeguards and controls. The process of setting up and running some types of pension scheme, such as master trusts is very light, with relatively little scrutiny of the individuals involved or the financial resources standing behind them.

“Recent high profile final salary scheme problems illustrate that the governance of workplace pensions generally is in need of review. This Committee report, coming just a few days before the Queen’s speech, looks like a timely reminder to the Government that a Pensions Bill to address these concerns might be a necessary addition to their forthcoming legislative programme.

“Pension schemes regulated by the FCA, such as Group Personal Pensions and Group Sipps can be considered a much lower risk than Master Trusts; similarly, any Master Trust scheme which has the Pensions Regulator’s Master Trust Assurance stamp of approval is likely to be well run.

“In view of these ongoing concerns about the risks to auto-enrolment, the Government might also want to look at the option of allowing individuals to make their own choice about which pension their employer’s contributions are paid into, thereby putting the individual in control of their own financial future.”

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