The House of Lords has amended the upcoming Pension Schemes Bill to introduce a lifeboat fund for failing master trusts. James Phillips asks if this is a good idea
The Pension Schemes Bill, introduced in October, is aimed at bringing in new protections for master trust members after years of the sector being fairly unregulated.
However, the House of Lords felt the draft rules did not provide adequate protection for members and voted to amend the legislation to mandate the Department for Work and Pensions (DWP) to set up a 'funder of last resort' for failing master trusts.
Suggesting the change to the legislation on 19 December, Labour peer Baroness Drake argued the fund could take the form of a "pension scheme with a last-resort public service obligation, or an obligation on master trusts for tail-risk insurance".
However, with detail within the amendment vague, pension professionals have expressed concern over how the fund would actually work.
Former Pension Protection Fund (PPF) chief operating officer (COO) Peter Walker - now COO of Smart Pension - argues the proposal could already be funded using any surplus created by the "general levy".
The levy - which is administered by the DWP and funds The Pensions Regulator (TPR), The Pensions Ombudsman, and the Pensions Advisory Service - was estimated to have a £13m surplus in 2016.
"Schemes with a shortfall or small schemes that would be uneconomic to integrate won't really be picked up, so there are going to be cases that will need some form of help," he says.
"One way of achieving this would be to have funds that have been collected through the existing general levy - which is in significant surplus at the moment - available through some form of authorisation structure to plug the gaps for these schemes, pending introduction of these further responsibilities for trustees.
"It seems a potentially neat solution."
However, Walker dismisses creating a fund similar to the PPF, arguing it would create a moral hazard risk for master trusts.
"It's fair to say that the PPF created quite a lot of perverse incentives," he continues. "It created incentives for employers to be able to dump a defined benefit (DB) scheme with a deficit through pre-pack deals and other similar transactions.
"It also allowed trustees to take more risk when a shortfall came up knowing that PPF compensation was there as a floor.
"You've got to be careful that you don't make matters worse, and create a tax and pass the cost of failure on to other people and let people take advantage of that."
However, Now Pensions director of policy Adrian Boulding disputes that the fund should be paid for out of industry fees, arguing the government should foot the bill instead.
"What we are setting up is a system of regulation that says master trusts will be properly capitalised and run by decent and proper people," he says. "If the regulation works, we won't have this situation. We may have a problem with the existing master trusts and that's because we didn't have regulation in place.
"If the regulation has failed and that has led to there being inadequate money to wind up the master trust, then the government should pay for that because it's a problem caused by the government."
Boulding argues instead that such a fund should exist purely for the administrative and legal costs of winding up, as opposed to taking in members in a similar way to how the PPF operates for DB schemes.
"You might need some money which you then spend on pension administrators and lawyers in order to clean up data and sort out the scheme, and then move them somewhere," he comments.
"Once the scheme is cleaned up and the data is sorted out, I think commercial providers will happily take the members."
PTL managing director Richard Butcher agrees the fund should only be used for administering the wind-up, rather than paying for member benefits.
"The fund could be that the government puts up some cash to fund a wind up, or it demands other people to put up some cash to fund the wind up," he says. "It's a sensible mechanism and there needs to be sort of mechanism in case something is horribly messy and nobody is willing to take it on."
However, he questions the vagueness of the amendment.
"What do they mean by that?" he continues. "In what circumstances would it be deployed? What avenues will have been considered before it is explored? Who is that funder going to be?
"The nervousness that I have is that the well-run, well-constituted, well-resourced schemes end up picking up the tab for those poorly run, poorly resourced schemes.
"I wonder if it doesn't open the door for a PPF-esque defined contribution scheme, which I'm not sure would be a good outcome. We need a lot more detail."
Meanwhile, Aegon head of pensions Kate Smith cautions the proposal could duplicate regulation that already exists.
"The bill is designed to bring regulation and member protection closer to that provided by Prudent Regulation Authority [PRA] and Financial Conduct Authority regulated firms," she states.
"Master trusts run by PRA-regulated firms already benefit from higher capital adequacy standards than those proposed by the bill, meaning that their funds are already protected in the event of a wind-up.
"A lifeboat scheme for master trusts run by PRA-regulated firms simply duplicates regulation, with additional cost for no customer benefit."
The amendment was passed, but could again be removed during parliamentary 'ping-pong' over the next year. The overall planned regulation is not expected to take effect until 2018.
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