11.Responsibility for the regulation of workplace pensions is divided between the Financial Conduct Authority (FCA) and TPR. The FCA regulates contract-based schemes, in which scheme members sign a contract with a pensions provider appointed by their employer to run the scheme. TPR regulates trust-based schemes, which are sponsored by the employer but managed by a board of trustees. Defined contribution (DC) schemes, such as those typically used for AE, can be either trust or contract-based. The FCA and TPR say they “have similar expectations for scheme quality and member outcomes”. Our predecessor Committee, however, expressed concern about “regulatory gaps” and recommended the creation of a single pensions regulator.
12.Over the course of this inquiry, we heard concerns that the savings of some automatically enrolled employees may be at risk as a result of under-regulation of pension providers known as “master trusts”. In this chapter we examine the proliferation of master trusts in the AE market and the potential risks to AE savings.
13.A master trust is an occupational pension scheme for multiple, unconnected employers. There is one legal trust and therefore one board of trustees. Each employer, however, has a separate division within the main trust and decisions on matters such as investment and service providers are made independently. Master trusts are regulated by TPR.
14.The master trust model is a good fit with AE. They can provide the ongoing oversight of investments provided by a trustee board at lower operating costs than single employer schemes, through economies of scale from pooling administrative functions. TPR encouraged employers to consider large multi-employer schemes for AE because they were “better placed to meet the standards […] necessary for good outcomes for retirement savers” and expected master trusts to dominate the market. The predictions proved correct: nearly half of employee enrolments into DC schemes between April 2014 and March 2015 were into master trusts. 94% of employers who chose a trust-based scheme opted for a master trust.
15.There are around 72 registered master trusts that are currently open. Once a master trust is on the market, employers are free to choose it to comply with their AE duties, so long as it meets the standards of a qualifying scheme. We heard various concerns that TPR’s regulatory powers with regards to master trusts are insufficiently robust. TPR said that it was concerned it was “not able to exercise stronger regulation on this group, given their importance, the number of employees—members they are serving”.
16.Concerns about master trust regulation begin when a master trust is set up. “Rigorous standards” and capital and solvency requirements enforced by the FCA act as barriers to entry for contract-based pension providers. By contrast, Lesley Titcomb, Chief Executive of TPR, told us that she was not able to issue equivalent regulatory authorisation for trust-based schemes:
we just learn about a master trust being set up through the Revenue telling us, so there are no checks at the gateway.
17.Once in the market, we heard that trust-based schemes are “not subject to the high level of ongoing regulatory scrutiny and active monitoring given to contract-based schemes”. While the FCA can issue legally binding rules to support its regulatory functions, TPR relies on non-binding guidance. The Association of British Insurers (ABI) said this led to practical differences in the regulation of the two parts of the market, including “lower standards for the specificity of risk warnings and the provision of communications to members for trust-based schemes”. The TPR acknowledged that some of the smaller master trusts “may not be run by competent people”. Inadequate regulation increases the prospect of “substandard governance and investment strategies”, which could make poor investment returns for scheme members. A proliferation of poorly-governed master trusts would also limit their ability to become large in scale, undermining their ability to provide cost-effective retirement saving.
18.Joanne Segars, Chief Executive of the Pensions and Lifetime Savings Association (PLSA), warned that the financial burden of winding up a failed undercapitalised master trust may fall on individual member pension pots. Baroness Altmann, Minister for Pensions, (the Minister) shared this concern:
there is no protection for wind-up in master trusts, which is why I am so exercised about it.
19.This, she said, could encourage providers to attempt risky trust-based models of provision with relative impunity. A recent BBC article claimed that some master trusts were deliberately misleading clients and were in danger of collapsing. Andrew Warwick-Thompson, an executive director at TPR, acknowledged that there was a risk of some of the schemes collapsing and members losing their savings.
20.TPR has taken steps to mitigate the risks posed by poorly-run master trusts. In May 2014 it published a master trust assurance (MTA) framework, developed with the Institute of Chartered Accountants in England and Wales (ICAEW). This enables reputable schemes to demonstrate adequate standards of governance and administration and, in turn, TPR signposts employers to such schemes. Nine master trusts have received MTA accreditation, including NEST, Now: Pensions and the People’s Pension. Many of the same firms are among the 12 master trusts that have been through the PLSA’s parallel “quality mark READY” governance assurance scheme.
21.Such accreditation schemes are, however, voluntary and TPR has no power to compel trusts to meet MTA standards. Large and accredited master trusts supported calls for a stronger regulatory framework. Lesley Titcomb told us that there was “a gap” in her organisation’s powers and she was in discussions with the DWP about how this might be addressed. We put our concerns to the Department, and Charlotte Clark, Director of Private Pensions, acknowledged that the growth of master trusts had taken them by surprise. The Minister assured us that the immediate risks to savers were small, but that the problem needed to be addressed urgently:
I don’t want to scaremonger. There are tiny amounts of money in these schemes at the moment. Now is the time to be looking to do this. That is why I am so exercised about pressing for this now.
22.The Minister told us that she was pressing her colleagues in Government for a new Pensions Bill. Charlotte Clark added that the Department had been “working through the policy and what is the right approach for this, so that we would be ready to legislate as soon as we could”.
23.Gaps in pension law and regulation have allowed potentially unstable master trusts onto the market. Should one of these trusts collapse, there is a very real danger that ordinary scheme members could lose retirement savings. There is also a risk that faith in auto-enrolment as a whole will be undermined. We support the Minister’s call for a Pensions Bill to introduce stronger regulation of master trusts. We recommend the Bill makes provision for The Pensions Regulator (TPR) to have power to enforce:
12 The Pensions Regulator and FCA,
13 House of Commons Work and Pensions Select Committee, Sixth Report of Session 2012-13, , HC 768-I and , HC 668
14 The Pensions Regulator and FCA,
15 The Pensions Regulator () and The Pensions Regulator, , July 2015
16 The Pensions Regulator ()
17 A qualifying scheme that meets three tiers of requirements: Automatic enrolment criteria, e.g. no requirement for the jobholder to complete an application form; qualifying criteria, e.g. must be tax registered; and minimum requirements, e.g. the employer must make contributions in respect of the jobholder.
18 (Lesley Titcomb)
19 Association of British Insurers ()
20 (Lesley Titcomb)
21 Association of British Insurers ()
22 Association of British Insurers ()
23 BBC, , February 2016
24 Association of British Insurers ()
25 (Joanne Segars)
26 (Baroness Altmann)
27 (Baroness Altmann)
28 BBC, , February 2016
30 The Pensions Regulator ()
31 (Joanne Segars)
32 (Lesley Titcomb)
33 NOW: Pensions (); The People’s Pension ()
34 (Lesley Titcomb)
35 (Charlotte Clark)
36 (Baroness Altmann)
37 (Baroness Altmann)
38 (Charlotte Clark)
Prepared 13 May 2016