I sat next to someone at a meeting yesterday whose demeanour, ideas and the articulation of those ideas, was so impressive that I was at times scared to open my mouth. I felt in the presence of greatness.
I’ve long known about Ian Pittaway and may have exchanged the odd conversation, but I had not before, benefited from what I can best describe as his sagacity.
So this blog is not just about Ian’s idea, but about the simple , forceful and memorable way in which Ian delivered it to an audience of “industry leaders” struggling to find answers to intractable problems relating to master trusts.
The meeting was (I suspect) under some version of master trusts but I asked Ian at its conclusion, if I could share his idea so here it is.
From whence cometh our aid?
The central issue that concerns Government is the lack of Capital to clear up the mess if a mastertrust goes bust either through fraud, negligence or just bad luck.
The problem is that most master trusts have barely enough “in reserve” to pay their day to day bills and could be knocked sideways by the slings and arrows of outrageous fortune.
Faye Murray, comment on a blog on this site , that a master trust her law firm (Addleshaw Goddard) is involved with has already incurred fees of £800,000 as it struggles to wind itself up. The sums are large, and they are made larger because most participants (other than those paying the bills) have no reason to keep the bills down.
Ensuring that these bills are as low as possible is high on the list of Government “to do’s” but yesterday’s group (largely lawyers) confirmed that this was a tall order.
From whence cometh the master trust’s aid?
The PPF as administrator of an insurance scheme
Ian’s idea, a brilliant idea, was to turn to the PPF, not as a lifeboat, but as a means to organise the insurance between all master trusts offering services to employers (under auto-enrolment) or individuals (exercising pension freedoms).
The idea is to create a kitty based on the risk-based levy established for occupational DB schemes which would be administered by the Pension Protection fund and drawn upon where a master trust through ignorance, negligence or its own deliberate fault could no longer pay its bills.
Those mastertrusts most at risk of failing would be required to pay the most (or give up the ghost before it got too late). Those with least risk (perhaps because they have capital of their own) would pay least.
Undoubtedly this would reduce the numbers of small mastertrusts and eliminate the weakest who would have no option but to cease trading and transfer assets (on the most propitious terms) to a stronger neighbour. This may sound drastic, but prevention is better than cure and if we want to avoid another Equitable like fiasco, implementing this idea now, is a prudent intervention that gets my total support.
I would add that adoption of this levy approach works best where the totality of master trusts participate. I can see an argument for master trusts with access to capital (NEST for instance with its remaining drawdown from the DWP loan) might want to avoid the levy, but it would be divisive and detrimental to the running of the scheme if well capitalised master trusts were to buy their way out of participation. Their costs will be much reduced as a result of there being capital to pay any bills – they have least to fear.
What then of liability?
It strikes me that there are a number of parties who could be seen as liable for the cost of failure. At the moment, the ultimate liability is with the beneficiaries of the scheme, though – unless they have voluntarily entered the arrangement (to drawdown their pots) have had no say in the choice of the master trust for their or their employer’s contributions.
It is wrong that these members should be the long-stop. Instead, the liability for the failure, must rest with those responsible for the operation of the scheme, the sponsor and the trustees. I also believe that employers have some liability for choosing the scheme (though this view is I know contentious).
Many master trusts do not have named individuals sponsoring or acting as trustees. The sponsor is typically a company (with limited liability) set up to pull together the service providers needed to manage the money and collection of money. The trustees are typically corporate trustees (with limited liability) who can disappear like the morning mist at the first sign of trouble.
It is clear that the (mis) use of limited liability through corporate structures, is simply piling risks onto participating employers and onto members. Even where there is a risk-based insurance arrangement as outlined above, a higher degree of personal accountability is needed , for master trust operators and their trustees.
It is quite possible for sponsors and trustees to get these liabilities insured, provide that those insured are deemed “fit and proper”.
Fit and proper?
There are currently no rules governing who can look after your money in a master trust. I am of the opinion that where a master trust is holding itself out to manage money for the employees of organisations auto-enrolling and taking money from individuals wishing to exercise pension freedoms, those sponsoring and acting as trustees must all be deemed fit and proper according to the standards laid down by the FCA.
Without being deemed fit and proper, they should not be considered insurable anyway.
Assessing risk and apportioning liability
If , as Ian suggests, the PPF assess the risk of master trusts then we need clear metrics for the areas of risk- which I take to be
- the competence of fit and proper persons
- the costs of winding up the scheme
- pre-existing capital to pay for wind-up
- the business plan of the scheme
- its acccrediation (MAF+)
- the progress of the scheme to meeting its business plan milestones
- the exit strategy of the scheme
- the sustainability of the scheme
The PPF currently use Experian to assess each scheme. It is important that those considering investing into the scheme, whether an employer (auto-enrolment) or an individual (pension freedoms) has access to the PPF/Experian score.
I don’t think that individuals or employers should be barred from using schemes with low scores, but – if they do- they should be responsible for the outcomes of their decision – for (as with the PPF) an insurance scheme of this type could not provide members with 100% redress.
Where a member loses out through the lack of due diligence of an employer (eg where a scheme is used with a low PPF/Experian score), there’s a strong argument for an employer being liable for losses to staff members.
Good ideas are always simple
The simple idea outlined by Ian, to the admiration of the room, is surely worthy of very serious consideration. I include it in this blog because I know it is read by many who know more about the operations of these insurance schemes than I do.
There are risks that I have not thought of and undoubtedly there are commercial considerations that we need to better explore.
But I think Ian’s idea is “great”, and I felt, sitting next to him as he explained it to us, in the presence of greatness.
A PPF style safety net adopts the principle that the good pay for the bad (or perhaps unlucky) but agree that setting the metrics for measuring the mastertrust and any levy may well be a step in the right direction of at least introducing a low level barrier for entry which currently does not exist.
I wonder whether the insurance market (most likely the Lloyds market) could provide an additional backstop in the form of stop loss cover. The challenge would be setting the criteria used to determine when a loss has occurred.
Perhaps Lloyds can provide professional liability insurance to the trustees and the basic insurances against operational failure (including Cyber insurance) to the Sponsors?
I don’t agree with the PPF idea. Instead, it should be a simple case that a Master Trust can only accept Auto-enrolment contributions if :-
1. Those running the trust are fit and proper
2. Charges are clear and simple
3. The scheme investments are ring fenced and not accessible to the administrators other than to pay benefits
4. The employer has responsibilities and is liable if a master trust fails. This is the most important point in my opinion.
The employer choosing a particular master trust, liable for the member detriment if the MT fails? That will not go down well with employers but it certainly would certainly put some edge into choosing a pension. I have suggested this Mike and have got some pretty stern looks from employer federations!!