New bill aims to protect workers' pensions
THE Department for Work and Pensions (DWP) have published a new bill which aims to impose higher standards on master trusts, thereby protecting the 10 million people expected to be saving into a workplace pension by 2018.
The bill - dubbed the Pension Schemes Bill - will set minimum requirements on governance and financial sustainability that a master trust will have to meet in order to remain licensed.
These include confirmation that "persons involved in the scheme are fit and proper", and that "the scheme funder meets certain requirements in order to provide assurance about their financial situation."
Together, such measures will help to ensure that the 1.8 million small employers putting employee pension contributions into third-party trusts won't suddenly find one day that these contributions have disappeared into a financial black hole.
Still, while the bill's rulings are preferable to a system in which anyone could start running a master trust fund, there's a worry that the new minimum requirements may have certain counterproductive effects.
For example, since there already exists a voluntary Master Trust Assurance Framework that requires higher-than-minimum standards, the introduction of minimum requirements may potentially make employers think it's safe to move away from the securest possible trusts to schemes that are less robust.
That the Bill won't simply make the Assurance Framework mandatory for all trusts was something lamented by Morten Nilsson, the CEO of one of the biggest master trust funds in the UK, Now: Pensions.
He said, "It is disappointing that the master trust assurance framework won't be made compulsory as part of the licencing regime". He went on to add, "Making it compulsory and building on this existing framework seemed logical."
However, the simple failure to make it compulsory isn't the worst of it. In fact, because the minimum requirements are being added to an existing voluntary framework, the latter may find its value and effectiveness being undermined.
With the establishment of a minimum approval regime, there may end up being less impetus for a trust to gain accreditation according to the higher standards of the Framework.
As such, standards within the master trust market may potentially slip, with the overall, aggregate safeness not being as high as it could have been.
Vagueness and discretion
Aside from this worry, there's also the question of what the regulations will mean in practice and how effective they'll be.
For instance, the first of the five criteria a master trust will have to meet to retain its licence is that persons involved in its management should be "fit and proper".
As the Government themselves admit [PDF], "There is no definition in the legislation of a 'fit and proper person'".
Because there's no such definition, there will be no reliable, systematic way of ensuring that master trusts meet exactly the same minimum standard.
Similarly, while the second criterion asks that trusts be "financially sustainable", they won't be subject to a minimum capital requirement.
Since trusts vary in size, this is from one angle a sensible decision, since any single capital requirement would put smaller trusts with smaller resources at a disadvantage.
However, it once again means that much of the assessment of master trusts will be conducted on a case-by-case basis, and judged according to the discretion of The Pensions Regulator.
Ultimately, this might mean that accreditation according to the new standards will mean different things in different cases, and that therefore it won't provide quite the same guarantee of security from one trust to another.
But even if this is a possibility, it still represents an improvement over having no mandatory minimum requirements.
That it will be an improvement was suggested in February when it was warned that the workplace pensions of over 250,000 people were locked into master trusts that are too small to survive.
In certain cases, these were trusts who weren't always operating as transparently as possible, with no clear indication of who runs them or where they've invested the contributions of employees.
It's therefore a very good thing that they'll now be forced to demonstrate their business plans, their continuity strategies, and the suitability of their owners for the job of managing them.
And depending on whether pension freedoms are a genuine help or an invitation to irresponsibility, it's also a good thing that the bill will place an (as of yet unspecified) cap on the exit fees holders have to pay to withdraw their savings.
As a result, they'll be able to withdraw lump sums from their pensions more easily, all the while knowing that the master trusts into which their employers have placed their contributions meets certain binding requirements,
In other words, pension holders have greater assurance on both sides: the assurance that their trust isn't entirely disreputable, and the assurance that, just in case it in fact is, they're more able to take their money out of it.