The introduction of auto-enrolment in the UK has generated renewed interest in the master trust model. Employers are increasingly choosing master trusts because they take care of much of the administration and governance of employee pensions. Master trusts can also obtain preferential investment management and administration charges by virtue of economies of scale through pooled asset arrangements.
The range of master trusts now available has created a competitive market offering employers real choice. However, some master trust structures lack independence, raising concerns about governance arising out of potential conflicts of interest – for example, where trustees, investment managers or administrators are tied to the trust provider. Indeed, a lot of master trusts are owned by the providers and are run for profit. However, it is important the trustees act in the interests of members at all times and are seen to be doing so.
As with any pension fund, the choice of advisers needs to be carefully made to avoid any conflicts of interest. The Pension Regulator’s 2008 guidance Conflicts of Interest states: “Trustees should ask themselves what are the advantages for members in retaining a conflicted adviser if – as may well be the case – they could instruct alternative advisers with similar expertise who would not be conflicted.”
Where master trusts have service-provider representatives on the trustee board, it is particularly important this does not influence trustee decision-making. The conclusion for many master trusts may be to separate the day-to-day running of the business entirely from its trustee function and ensure there are no links whatsoever between the trustees and the commercial provider of the master trust.
I share the Pensions Regulator’s view expressed in its strategy for regulating DC schemes that the market entry level for master trusts should be set high enough so that only providers with durable business models are able to participate in automatic enrolment. Master trusts offer scale and should have sufficient resources to accommodate procedures that help maintain and demonstrate quality standards.
It is particularly important that trustees approve a plan to manage the scheme and protect member benefits if the provider decides to wind up or close the master trust, transfers ownership of the trust or becomes insolvent, or is unable to continue to operate for some reason. It is critical employers choosing master trusts understand how members’ funds would be affected if any of these scenarios were to occur.
The Pensions Regulator has published the following six principles for DC schemes to promote good governance, administration and communication.
- Essential characteristics: schemes are designed to be durable and fair and deliver good outcomes for members
- Establishing governance: a comprehensive governance framework is established at set-up, with clear accountabilities, and responsibilities agreed and made transparent
- People: those who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them out
- Ongoing governance and monitoring: schemes benefit from effective governance and monitoring through their full life cycle
- Administration: Schemes are well administered with timely, accurate and comprehensive processes and records
- Communication to members: Communication to members is designed and delivered to ensure members are able to make informed decisions about their retirement savings
These six principles explain what the Pensions Regulator expects DC schemes to do in pursuit of good member outcomes. They are underpinned by the activities, behaviours and control processes that are more likely to deliver such outcomes.
The Institute of Chartered Accountants in England and Wales (ICAEW) and the Pensions Regulator have worked together to develop a supplement to their AAF 02/07 assurance framework technical release for master trusts, which was published for consultation in the autumn. This type of assurance framework is already used extensively throughout the pension sector for investment providers, custodians and pension scheme administrators to demonstrate controls are operating effectively.
The control objectives in the mast trust supplement are aligned with the DC quality features and have been framed to focus on ensuring individual members’ interests are protected.
Assurance can play an important role in raising standards of governance reporting, and this framework will allow trustees of master trusts to provide important information to employers and scheme members about how the trust is adhering to the Pension Regulator’s principles and quality features.
Andrew Penketh is head of pension funds at Crowe Clark Whitehill