A big trim for master-trust pension schemes

published 21 September 2018

914_MW_P31_pensions_top — Master trusts evolved out of pension schemes for hairdressers and builders

One in four of these pension schemes will close due to tougher regulations.

More than one in four master-trust pension schemes which collectively look after the retirement savings of millions of savers are set to close, according to The Pensions Regulator (TPR), the workplace pensions watchdog. The closures are the result of new regulations coming in over the next six months that are intended to reduce the risks of the schemes.

Master trusts have evolved out of occupational pension schemes that were originally set up to provide pensions for people working for many different employers in industries such as hairdressing and building. Such schemes had only 200,000 members a decade ago, but the structure has become hugely popular since the launch of the auto-enrolment system, which requires all employers to offer their staff access to a pension scheme. Joining a master-trust scheme is a more straightforward option for many employers than setting up their own plan. However, there has been growing concern about standards in the sector.

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Some master trusts are too small to be economically viable, while in other cases there have been claims of malpractice. In addition, savers with money invested in master trusts aren't automatically protected by the Financial Services Compensation Scheme so if a scheme were to go bust, their money could be at risk.

Consequently, TPR is introducing an authorisation system, with master trusts required to meet minimum standards in order to continue operating. The rules, which take effect from October, will require master trusts to maintain minimum amounts of capital and to set out coherent investment policies that do not expose members to undue risk.

Of more than 80 master trusts in operation, 24 have already said they will close rather than seek to meet the new standards, says TPR.The watchdog is working with these schemes to ensure savers' accounts are transferred to new providers with no disadvantage. But the news that so many master trusts do not feel able to operate under stricter regulation will concern savers whose money is invested this way. In all, master trusts are now thought to look after the savings of ten million members of workplace pension schemes, managing around £16bn of investments.

Many master-trust members may not even realise they are covered by such an arrangement. And while it is possible to transfer savings already built up to a different type of scheme, employees have no say in the type of arrangement their employers use on an ongoing basis.

David Prosser is a regular Money Week columnist, writing on small business and entrepreneurship, as well as pensions and other forms of tax-efficient savings and investments.

David has been a financial journalist for almost 30 years, specialising initially in personal finance, and then in broader business coverage. He has worked for national newspaper groups including The Financial Times, The Guardian and Observer, Express Newspapers and, most recently, The Independent, where he served for more than three years as business editor. He has won a number of awards, including the Harold Wincott Personal Finance Journalist of the Year, the Headline Money Journalist of the Year and the BIBA Journalist of the Year. He has also been a frequent contributor to broadcast news, providing expert advice and punditry on radio and television.

For the past ten years, David has worked as a freelance journalist, writing for a broad range of newspapers, magazines and online publications. He also writes a regular column for Forbes, and is a frequent contributor to both specialist and consumer publications.