The Regulator’s right to be cautious about mastertrusts

logo-banne_380Over the past two years we’ve seen a number of multi-employer occupational schemes spruced up for auto-enrolment.

We’ve seen a number of insurers and asset managers set up as the providers of master trusts.

We’ve had a few financial advisers set up as master trust providers

We’ve even had the Danish and British Government set up master trusts trading as NOW and NEST which offer what we might call sovereign funds

The Pension Regulator is now taking a long hard look at what is going on. The barriers for entry to become a master trust provider are ridiculously easy. All you need is access to a pension administration system, a way of delivering some funds and some people who are prepared to act as trustees.

The trustees do not need any qualification , the arrangement need not be covered by the Financial Services Compensation Scheme , be registered with the FSA or be subject to the Solvency rules laid down by the EU.

If ever there was a financial accident waiting to happen, it is the pension master trust.

This blog is not an incitement to financial crime – nor is it pointing the finger at any of the master trusts on the market. But it is making the point that if these master trusts are to take the billions of employer and employee contributions flowing from auto-enrolment, somebody is going to have to provide some independent supervision.

The Pension Regulator is right to point to conflicts of interest. It is hard for these schemes to be marketed independently when the principal stakeholders- insurers, asset managers, administrators and advisers are all marketing themselves to their customer pool as both a provider and adviser.

The consultants who are offering master trusts, Goddard Perry and Xafinity, have close links to the administration units that are employed within the trusts. Black Rock is a funds provider and an insurer but it markets these services both in and outside the trust. The same conflicts arise with Standard Life, Legal & General and Zurich. These are commercial organisations which are often packing the trustee boards with their own executives (a bit like the governance of the GPP’s they also supply)! Even the bold privateers such as Supertrust are , by dint of their acting as fiduciaries and shareholders subject to the same potential conflicts.

On the other side of the fence are the not for profit master trusts. There is a long history of multi-employer schemes set up for the purposes of a specific industry. Many, though not all, have set out their stall as able to accept contributions under auto-enrolment, mostly on a DC basis. BlueSky and Wellplan are both backed by Unite the Union, the Pensions Trust and its sister The Social Housing Pension Scheme are well established mutuals while the Merchant Navy Officers Pension Plan , the Plumbers and the Motor Industry all have capacity and willingness to play.

We have seen mutual models work as master trusts. They are one of the fastest growing sectors of the Australian supertrust market and dominate the Collective DC market in Holland. In Denmark , a super mutual is operating as ATP, in the UK it has set up as NOW pensions. And we the tax-payer have spent over £300m so far to get the National Employer Savings Trust up and running, it’s a real not for profit and looks a guaranteed loss maker till well after the retirement ages of most of its current members.

For these organisations it is not the conflicts that are the concern, but the sustainability of their business model.

With the exception of the People’s Pension which is a mutual insurance company operating on a not for profit basis , none of the not for profit organisations have any obvious supervision. This puts them at an enormous advantage in terms of the amounts they need to spend on reserving against things going wrong, resourcing compensation schemes and simply spending the money ensuring they comply with the standards laid down for them.

The CBI have rightly warned against the dangers of over-regulating the not for profit master trusts but there seems a general consensus that something more than the association of master trusts is needed to make sure that we do not have the kind of accident that the financial services are so prone to.

I’m not keen on the Regulator’s 31 characteristics of a good DC plan, I reckon they can be simplified into five or six, but I do think we need to have a better conversation of what makes DC “good”.

The trick, and it’s a tough trick , is not to kill the vibrancy of these new players. If we look at the established insurers, we see precious little innovation. While there has been a little nudge towards mor sophistication in the accumulation phase of lifestyle among the insurers, their defaults look pretty much identical. By comparison, the master trusts , especially those in the not for profit sector, explore a wide range of alternatives and offer differentiated defaults with conviction.

If you use BlueSky, Pensions Trust or SHPS, you can access the excellent TDFs of Alliance Bernstein as your default. If you invest with SuperTrust you can access the Dimensional TAA system while NEST and NOW both offer sophisticated diversified growth funds that leverage their potential buying power.

This diversity and innovation needs to be maintained. If the price of a new regulatory approach is to drive this innovation out, we will have killed the goose.

This little wander through the master trust world has I hope demonstrated that it needs to be nurtured but also supervised. Not all master trusts are the same but they share some important characteristics. They are occupational pension plan, they are collective and they have the potential to take DC forward through the economies of scale they create.

We do not need a plethora of new master trusts since, as the Regulator points out, the scale can only be spread over so many propositions. The barriers for entry are too low, trustees need to be qualified, the trusts need to be audited not just for what they say they will do , but what they do.

Finally, we need to look closely at their finances, not for profit is one thing, not profitable another. If a master trust was to fail, what would be its lifeboat – the PPF? A failure of a master trust would deal a hammer blow to the fragile recovery in confidence in pensions we are currently experiencing.

I am confident that master trusts are part of the long-term solution to Britain’s pensions problems. Promoting them responsibly is something I look forward to in 2013 and beyond. I will feel more confident in promoting them, if I feel they were better regulated. Ultimately this is why the master trusts should be welcoming the attention of the Regulator as much as I do.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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