MASTER TRUSTS Quality assurance

Master trusts will soon have to comply with five new benchmarks to provide a five star service. Ceri Jones, financial journalist, surveys the market

In a nutshell: 
  • the master trust market has been consolidating ahead of the tough new authorisation criteria outlined in the Pension Schemes Bill
  • master trusts will have to meet five new benchmarks, including new capital requirements, with the scheme funder meeting certain requirements that give assurance about its financial situation
  • they will also need to demonstrate adequate governance and administration processes, an adequate “continuity strategy”, and that trustees are fit and proper persons.

The master trust market has been consolidating, ahead of the tough new authorisation criteria outlined in the Pension Schemes Bill. Master trusts will have to meet five new benchmarks, including new capital requirements, with the scheme funder meeting certain requirements that give assurance about its financial situation.

Master trusts will also need to demonstrate adequate governance and administration processes, an adequate “continuity strategy”, and that trustees are fit and proper persons.

The legislation is currently at draft stage and will be subject to change (and probably to extensive lobbying) as it passes through Parliament.

It is expected to take effect in the new tax year.

Welcome regulation

On the whole, the regulations have been welcomed. “The requirement that a scheme must have enough capital in place to cover the cost of it having to be wound up protects members,” says Andrew Cruse, business development support manager at The People’s Pension. “They shouldn’t see their savings reduced to cover the cost of scheme failure. The second requirement – to have enough capital to cover running costs while it is winding up – is also common sense.

“We think this is an important and necessary Bill,” he adds. “Millions of people are now saving into master trusts and, as auto-enrolment continues, these numbers will only continue to grow. There are a lot of schemes in the market, and it would be unrealistic to think they will all survive. There is likely to be a period of market consolidation and savers need to have their assets protected while this takes place. For us, the Bill is the start of the story, not the end. Value for money and high standards should apply to all pensions. The government needs to raise standards for poorly performing, single employer trusts and ensure that independent governance committees are doing their job effectively.”

New regime

While at one stage there were over 80 master trusts, many of the smaller schemes have effectively exited the market. Even relatively large schemes, some of which felt they could not easily meet the new regime’s financial sustainability or independence criteria, have been sold on to other entities. At any rate, the bulk of the market remains concentrated in just a handful of schemes – NEST, The People’s Pension and NOW: Pensions.

However, there are still uncertainties about the new regime that need to be ironed out before providers can plan ahead.

“Two areas that require clarity are the capital requirement for running the scheme for between six months and two years, and the mechanism by which this will be determined,” explains Christine Hallett, chief executive officer at Carey. “This is important for providers to be able to build into their business plans.

“Secondly, we are keen to have clarity around what shape the proposed the Pensions Regulator authorisation requirements will take, and how this will interact (if at all) with the voluntary Master Trust Assurance Framework.”

Area of contention

One area of contention is that the Regulator will be given new powers to intervene where a master trust is at risk of failing. “The Regulator has not had these powers before,” says Penny Cogher, partner at law firm Irwin Mitchell. “The Financial Conduct Authority has a lot of experience policing life assurance and friendly societies and is accustomed to stepping in where necessary, or if the marketplace needs one company to take over another. The Regulator is a new layer of law and there is a query about its expertise, especially as this is being imposed at a time when its funding is being squeezed and there have been redundancies. The Regulator is very slow moving, which is partly a result of its history as the Occupational Pensions Board, and in the current climate this decision could prove to be a mistake.”

Ms Cogher also says that some large schemes are not structured in a way that will satisfy the new regulations. “For example, we thought that the Legal & General master trust would be impeccable and fly through the new (prospective) master trust regulations,” she says. “But when we analysed the documents, the sponsoring company is a group company that is responsible for L&G’s own DB pension scheme.”

We put this to Legal & General, who assured us that their master trust will be seeking authorisation. “We feel we are well placed to achieve it,” says Richard Atkins, the scheme manager.

Wide variety

Table 1 details the charges and features of these plans. Their structures and formats vary widely, making them extremely hard to compare in a like for like fashion. This year Pensions World asked schemes whether they offer an uncrystallised funds pension lump sum, known as UFPLS, which allows pension cash to be taken without going into drawdown or buying an annuity, and we are pleased to say that many trusts now offer this flexibility and at zero charge.

UFPLS can be used for ad hoc withdrawals or to deplete the fund in one go, taking 25% tax free and the remaining 75% taxable. BlackRock and SEI, for example, offer both full and partial UFPLS at no charge. National Pensions Trust also allows up to 12 UFPLS transactions per year free of charge.

The BBS (Supertrust) plan is also flexible and charges £48 per withdrawal, but Ascot and Salvus both charge £100 per UFPLS transaction.

This is a popular option for members, as auto-enrolment is still relatively new and substantial pots are as yet a rarity. Tobias Hilton, marketing manager at SEI, says that so far the majority of their members have withdrawn cash rather than going into flexi-access drawdown, with 55% choosing UFPLS to date.

Since this facility’s introduction in April 2015, the average UFPLS across the BlackRock platform has been £22,193, reveals Simon Pardoe, head of workplace proposition at Aegon, which acquired BlackRock’s defined contribution platform and administration business earlier in 2016.

Investment structure

With so much emphasis in the pension market on charges and features and client support, it is all too easy to lose track of the fact that the biggest impact on outcomes is undeniably the underlying investment structure. Table 2 shows the gross annualised performance of each trust’s default fund over one year and three years to December 1.

Many schemes such as BlackRock and BBS have updated their decumulation options so that the default funds feed into one of three retirement choices – annuity purchase, cash and drawdown – although few people currently buy an annuity.

Most trusts that previously used older style lifestyle funds have replaced them with a target date fund (TDF) structure. However, even these structures vary considerably from one scheme to another.

One of the most distinctive offerings is NOW: Pensions, which offers only one investment option during the accumulation stage, a diversified growth fund (DGF) with allocation on the basis of four risk factors: 35% to an equity factor; 35% to a bond factor; 15% to an inflation factor; and 15% to factors that aim to add further diversification to the portfolio.

Ten years from retirement age, investments are gradually switched to the Retirement Countdown Fund (RCF), which is fundamentally a cash fund. At retirement, 80% of a member’s fund will be invested in the DGF and 20% in the RCF. “That allocation will remain intact if a member does not take benefits at the selected retirement age,” explains Amy Mankelow, director of communications at NOW: Pensions. “This approach reflects the fact that retiring members are currently taking their full accrued funds as a cash lump sum.”

One scheme that does not use typical DGFs is B&CE’s The People’s Pension, which has opted for three equity biased funds with global asset allocations, under the banners “Balanced”, “Cautious” and “Adventurous”. The default investment is the “Balanced” fund, which is medium to high risk and typically holds up to 85% in UK and overseas equities. The trust also uses a 15 year decumulation glide path, which is longer than many of its peers.


Big weightings to equities are very much the exception, however. Most trusts are harnessing diversification across a range of assets to try to circumvent the risk of their members losing money in the years immediately before retirement without de-risking so drastically that opportunities for growth are lost, at a time when the member’s fund will be at its largest. LGIM, for example, has abandoned its previous default approach and is using a multi-asset fund not only for the accumulation phase but also during retirement. 

Another issue in the auto-enrolment market is the 0.75% default fund charges cap. In another context, Royal London recently won an exception from the Department for Work & Pensions to exclude property management costs from the cap. Nonetheless, the regulators have threatened to reduce the cap further if they feel that members are not receiving value for money, without defining quite what that is.

Certainly, one attraction of TDFs is that the managers remain in control of the investments, in contrast to lifestyle funds, where the assets have to be switched, creating more room for administrative errors. 

Independent assessment

Twelve schemes currently have the Regulator’s master trust assurance framework, which it developed in partnership with the Institute of Chartered Accountants in England and Wales. This is designed to help trustees assess whether their scheme meets equivalent standards of governance and administration to those set out in the DC code. For employers looking for a scheme for auto-enrolment, the presence of the assurance framework demonstrates that the scheme has commissioned an independent reporting accountant to assess the design and operating effectiveness of the control procedures in place.

There are two types of report. Type 1 checks the design of the scheme’s control procedures. Type 2 checks the operating effectiveness of those procedures over the reporting year. Trustees are likely to obtain a type 1 report in the first year and type 2 reports in every subsequent year.

There are 15 entries in our survey, which all have the assurance except Mercer, BBS and Carey Corporate Pensions which said they were being audited at the time of going to press. BCF Pension Trust and Welplan have been independently reviewed against the framework, but declined to participate in our survey.

Ceri Jones is an award winning financial journalist. She has edited several publications including the Investors Chronicle, Financial Adviser and Pensions Management.