Beware the master trust my son: Six causes for concern
Henry Tapper outlines six worrying misconceptions about master trusts.
Ok. It may not have jaws that bite or claws that clutch or be quite as frightful as the Jubjub bird, but the master trust may be no friendlier than Lewis Carroll's Jabberwock.
This is not a trendy thing to say, since if you're a pension consultant, the chances are you are pinning your hopes on your master trust with bells and whistles and impeccable governance. You may work for one of the big three - National Employment Savings Trust (NEST), Now or The People's Pension - or you may be offering master trust solutions to the IFA community to be rebadged and vertically integrated.
Well over half the 5 million newly enrolled employees are in master trusts, the National Association of Pension Funds desires assets to be aggregated into them and NEST Insight found that most employers got no further than comparing NEST "and one or two master trusts".
But this cult of the master trust should ring alarm bells - for auto-enrolment, for participating employers and most of all for the members of schemes.
So what makes master trusts ‘no-brainers'?
I've identified six claims that are made about them - all give me cause for concern:
1. Master trusts are cheap to join; currently large master trusts are subsidising installation costs from reserves, giving employees a free ride. This gives them a competitive edge but like credit cards, master trusts are for life not just for their initial rates;
2. They are trusts; a trustee board sounds friendlier than an IGC and a few choice names from pension's legion of honour are enough to tick the governance box for many. But when it comes to the acid test of governance, only two master trusts (Now and Peoples) have so far signed up to the Master Trust Assurance Framework (MAF), despite it deriving from the Institute of Chartered Accountants in England and Wales and The Pensions Regulator;
3. They stay clear of retail regulations; for now, master trusts are none of the Financial Conduct Authority's business, but with ‘freedom and choice' and the arrival of 1.3m small and micro employers, the traditional boundaries between institutional and retail are blurring;
4. They are easy to run; unlike insurance arrangements, master trusts are not subject to Solvency II and don't even have to undergo the capital adequacy tests needed to run an advisory firm. In theory this makes them nimble and cheap to run, in practice it means they run with little margin for error. Without adopting the controls laid out by MAF, are they as safe as contract-based arrangements?
5. They can invest anywhere; they are not subject to ‘permitted links' regulations (that restrict where insurers may invest). In theory maste rtrusts have greater flexibility, in practice this makes them the ideal vehicle for pension scams;
6. They can de-risk unwanted DC liabilities; they are taken to be a ‘safe haven' for employers. But they may not be. Contrary to what many suppose, you cannot offload your company's pensioners and deferreds into somebody else's master trust and wash your hands of the liability. You remain a participating employer of that master trust for so long as your former members are in it.
Whether master trusts are being used for auto-enrolment or to de-risk existing schemes or even as the template for collective DC, they are not a super-solution and should be subject to the same scrutiny as any other structure.
As one occupational scheme manager put it to me "why should I use a structure where I am liable for the risk but have no control of the management". She was considering how she could sign-post her ‘over 55s' and could see little comfort in the consultancy engineered master trust that was being offered her.
The adage "if it looks too good to be true..." applies. While there are good master trusts that rival the best contract-based plans in terms of price, governance, investments, employee guidance, auto-enrolment support and investment, there are many that don't and some that are no better than the "frumious Bandersnatch"!
Henry Tapper is a director at First Actuarial
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