Master trusts have to shape up
29 May 2019
This article was originally published on FTAdviser.com, on 07 May 2019.
Opportunities for advisers have been created by the new standards for master trusts and the triennial re-declarations of compliance every employer must complete. We explain these below.
The market is made up of contract schemes, own trusts, and master trusts.
Contract schemes are regulated by the Financial Conduct Authority, while trust based schemes are overseen by The Pensions Regulator.
Different sets of rules for what is, in reality, one consumer outcome can be confusing and makes comparisons across the market difficult.
Looking at the retail workplace pension propositions open to new business, it splits along the following lines: 28 per cent contract, 12 per cent own trust, 60 per cent mast trust (according to Defaqto).
However, this is about to change though. TPR has introduced tougher regulations for master trusts available and it is already understood that some will not meet them.
Master Trusts – the new standard
TPR now requires all master trusts in operation before 1 October 2018 to either pass their new standard or close.
Those wishing to remain in business were required to submit their application, along with a fee of £41,000, before 31 March 2019.
However, ten schemes have received short extensions.
Those who did not submit an application are now going through the closure process and transferring their members to new providers.
Those who submitted an application are now awaiting the monthly TPR update which declares trusts that have passed.
The first of these was published on 20 February, announcing that LifeSight from Willis Towers Watson had passed the assessment and become the first authorised master trust.
So, what is the new standard?
The Pension Schemes Act 2017 and the Occupational Pension Schemes Regulations 2018 have given TPR statutory objectives and new powers to meet them.
This has resulted in a new standard for master trust operators. In essence, master trusts need to be able to demonstrate that their scheme meets the required standards across the following criteria:
- Fit and proper: all the people who have a significant role in running the scheme can demonstrate that they meet a standard of honesty, integrity and knowledge appropriate to their role
- Systems and processes: IT systems enable the scheme to run properly and there are robust processes to administer and govern the scheme
- Continuity strategy: there is a plan in place to protect members if something happens that may threaten the existence of the scheme, including how a master trust will be wound up
- Scheme funder: any scheme funder supporting the scheme is a company (or other legal person) and only carries out master trust business
- Financial sustainability, including business plan: the scheme has the financial resources to cover running costs and also the cost of winding up the scheme if it fails, without impacting on members.
Following its first update on schemes progression through the new authorisation system on 28 February 2019 and last updated for 31 March, TPR released the following information on the 90 master trusts they were following:
- 3 authorised
- 27 application made
- 10 application extensions issued
- 6 decision not known
- 35 exiting
- 9 exited
From this we can conclude:
- At least 3 master trust schemes will be in operation in the new landscape
- 30 per cent of schemes hope to be in operation
- 18 per cent of schemes have yet to apply
- 49 per cent of schemes have closed or are closing
With the passing of the deadline of the 31 March, this position will change. That said, we know for definite that nearly half of schemes have decided to shut up shop.
Defaqto data also tells us that three off-the-shelf ‘Own Trust’ propositions have ceased to be available in the last six months.
Perhaps this indicates less of a desire for this type of workplace pension solution?
To summarise, the number of schemes available is reducing.
Those employers in schemes that are closing may well now be looking for advisers to help them avoid issues in the future.
One in three schemes guarantees to accept all completed applications that they receive.
This provides great peace of mind for those looking to avoid going through the effort of making an application only for it to be rejected.
Most providers describe their target market, providing useful information that helps advisers to segment the market place quickly.
Some schemes will only accept new employers (those going through auto-enrolment), while others only take on employers with established schemes. That said, many will accept both types of new business.
Where a scheme does not state its target market, further questioning may be prudent.
Common examples of restrictions providers often use to attract certain types of business include:
- Industry the employer operates in
- Employment contract types in use (providers dislike zero hour and seasonal contracts)
- Number of employees
- The average salary of employees
- Value of contributions of individual members and/or the employer
- Value of existing accumulated pension savings of employees
One area where workplace pension differs from other pension schemes is that the annual fee payable by members is capped at 0.75 per cent.
When fees are capped the cost stills matters. Defaqto estimates that a 0.75 per cent annual fund fee paid over a 50-year working lifetime can reduce the capital value by up to 20 per cent.
Many providers have adopted standard pricing below the 0.75 per cent cap, although careful attention should be paid to ensure that the figure quoted is the actual net fee that will be payable.
Some schemes charge the employees and/or employer additional fees for items like installation, administration and payroll.
Therefore, it is difficult and time consuming to make like-for-like comparisons on charges.
There are three types of fee to consider:
- Fixed fund fee
- Variable fund fee, plus fixed charges for employer and/or employees
- Variable fund fee, plus variable charges for employer and/or employees to pay
A reasonable contribution rate is good for both the employer and employees. The minimum auto-enrolment contribution rate from April 2019 is 8 per cent, this includes a minimum contribution from the employer of 3 per cent.
We suggest advisers consider with their employer clients what an appropriate return is for their employees after a complete working lifetime.
Then ascertain if the contribution rate being paid is sufficient to meet that expectation.
Auto-enrolment legislation contains optional allowances that result in the segmentation of employees with each segment being treated differently.
While this may be permissible within pension law, arguably it contravenes the Equality Act 2010.
The Equality Act expresses ‘indirect discrimination’ as a provision, criterion or practice which may at first appear neutral in its effects, but at closer examination, disproportionately and adversely affects a person’s protected characteristic (such as sex or disability).
An employer can justify indirect discrimination if they can show that the provision, criterion or practice put in place is a proportionate means of achieving a legitimate aim.
Therefore, advisers should highlight to their employer clients if they are operating indirect discrimination and ascertain the appropriateness of the strategy in achieving a legitimate aim.
It is possible employees working in part-time and low-paid roles might consider that they have been indirectly discriminated against if they are not enrolled in their employer’s workplace pension scheme on the same terms as other employees.
One should also remember that according to the Office for National Statistics data, employees in these positions will be disproportionately female and/or disabled.
Advisers should consider carefully if and how any employees are segmented based on ‘salary’ and/or ‘age’.
In addition, consideration should be given to the appropriateness of the ‘tax relief system’ used and whether any groups of employees could feel excluded, that is, by the failure to provide access to a ‘Sharia compliant’ solution.
This is explained in the ‘Guide to reviewing workplace pensions’, which is free to download from the Defaqto website.
To illustrate how an employee can be affected by their employer adopting some of the optional exclusions we can consider Sarah’s situation.
Sarah is aged 30 and works full-time, earning £25,000 per annum.
Despite the headline minimum contribution rate being 8 per cent, she does not receive this.
This is because her employer excludes the first £6,136 of her salary from the calculation. She actually receives 6.04 per cent; a loss to her of 1.96 per cent or £490.88 per annum.
Sarah considers working part-time and while her pro-rata salary remains at £25,000 she discovers:
Days worked pw
Contributions as % of
By moving to part-time hours the outcome for Sarah would be a cut in pension contributions as a percentage of her salary, in other words, a pay cut.
Indeed, working one day a week would see her entitlement fall to zero.
As a minimum we suggest advisers consider the following high-level facts when undertaking their due diligence assessment:
- Diversification across asset classes and strategies
- Actual performance, over a reasonable time frame
- Performance against the fund’s own preferred benchmark
- Performance against an agreed preferred benchmark
Defaqto collects data on performance and we can see significant differences in return.
Advisers should ascertain how any default fund they have recommended is performing in comparison to its competitors in real terms.
This is a huge subject in its own right and Defaqto has published a free to download guide reviewing the market.
This is entitled ‘How to analyse workplace pension default funds’.
For employees we are also seeing the introduction of protection planning guidance tools, money off and lifestyle offers.
While for employers HR packages, payroll packages and guidance tools on business borrowing and protection.
We expect this diversification in products to accelerate over the coming years.
Advisers will increasingly find that their clients have savings in workplace pension schemes.
Many of these schemes already act like platforms providing income in retirement options and the ability to invest in other tax wrappers.
This means it may be prudent to recommend your private client utilises their workplace solution rather than any other.
It may well soon be a regulatory requirement for workplace solutions to either offer income in retirement pathways or access to financial advice.
This change will certainly impact on the due diligence considerations.
Every three years, every employer must submit a ‘re-declaration of compliance’ to TPR.
While this process is aimed at re-auto-enrolling employees, it does make many employers re-evaluate the appropriateness of their existing scheme.
Common factors that make employers reconsider their pension provider are costs, IT issues, service, and default fund performance.
Being able to help employers carry out an evidence-based assessment and remove these issues effectively could make provide a key differentiator for an adviser resulting in the employer (and employees) potentially being open to further advice.
The good news is that regulators are taking steps to reduce risks in the market.
While initially higher standards are reducing the number of schemes available, they are also giving us peace of mind regarding using the schemes that remain.
Currently, workplace pensions offer a great opportunity for advisers.
Many employers are looking for help in the assessment of their existing arrangement, often triggered by the triennial review.
In addition, those who have seen their scheme close due to the new regulatory standards will also be seeking an adviser to help them avoid issues in the future.
Workplace pensions is not a risk free environment for advisers.
There are a number of significant issues advisers should be considering. Arguably, the main ones are contribution rates, indirect discrimination, charges, and performance.
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