Who is the master? Who can be trusted? Guest blog from Ralph Frank

 

ralph master

There has been increasing clamour in recent times for more stringent regulation of Master Trusts.  The Government has duly obliged, tacking a Pensions Bill onto the Queen’s Speech.  The details of the Bill are currently light, although it is promised that “Master Trusts would have to demonstrate that schemes meet strict new criteria before entering the market and taking money from employers or members”.  I am, however, baffled by the need for these strict new criteria.

 

Master Trusts, as the name suggests, are Trusts governed by Trustees.  These Trustees have, in theory, a fiduciary duty to act in the interests of the members of the trust.  This governance structure is a key attraction of a Master Trust.  If the governance arrangements are working as intended, why then the need for the strict new criteria?  If the governance arrangements are not working, why is the Pensions Regulator not holding the Trustees in question to account?  A few enforcement actions would accomplish a whole lot more, a whole lot quicker than adding more pages to the already over-stuffed and over-complicated statute books.

 

Master Trusts are free-standing legal entities.  The Master Trust can’t earn any ‘profits’ as all earnings belong to the members.  That said, a large number of Master Trusts have been established by commercial organisations and even share these organisations’ branding – e.g. the ABC Master Trust administered by ABC with investments managed by ABC.  However, the Trustees of these Master Trusts cannot, by law, be bound to specific service providers.  Would the appointment of all, or even most, of these service providers stand up to independent scrutiny?  If not, how are the Trustees in question carrying out their fiduciary duty?  The decision to introduce further legislation seems to indicate that this fiduciary duty is not being properly fulfilled.

 

A contributing factor to the clamour for more regulation has been the closure of at least one Master Trust and the consequent impact on the savings of the members of the affected Master Trust(s).  Surely, Trustees should be making financial provision for the costs of running and potentially winding-up of the Trust they control?  I have seen some service providers to Master Trusts extol the virtue of their financial commitment to the Master Trust.  However, is it the service providers’ role to provide such a financial commitment, particularly as the relationship cannot be hard-wired, or should the Trustees not be making prudent financial plans?

 

One way to build up the financial resilience of a Master Trust is to charge members more than the cost of running the Master Trust in the short-term.  The larger the membership base, the quicker this point of resilience is reached when fees per member exceed costs.  Achieving this scale might be one incentive for the Trustees to actively seek additional members and assets.  Once the point of resilience has been reached, will the Trustees pass the efficiencies back to the members or will these accrue to other parties?  If the latter holds, are the Trustees fulfilling their fiduciary duty?

 

The Pension Regulator’s second edition of the DC Code of Practice, currently before Parliament, sets out best practice in DC.  It is quite comprehensive from an operational perspective.  If Trustees are fulfilling their fiduciary duty and complying with the (voluntary) Code then there seems to be no need for further regulation, such as raised in the Queen’s Speech.  Why not simply enforce the existing provisions of trust law to protect members of Master Trusts?

About henry tapper

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