Why ask this question?
Master Trusts had until 31 March 2019 to apply for authorisation from the Pensions Regulator (TPR). To date 23 have obtained authorisation as listed on TPR’s website, just over 35 Master Trusts have applied for authorisation.
Those Master Trusts who don’t apply for authorisation will be withdrawing from the Master Trust arena and will be triggering the wind up of the arrangement. Prudential is just one example of a provider that has decided to wind up its Master Trust. Employers’ who have been using the arrangement will be given the option of a new group personal pension (contract based arrangement) with Prudential for auto-enrolment purposes. Current members of its Master Trust will move to an individual policy with Prudential which will have a default investment strategy.
TPR has said that its decision-making process on authorisation could take up to six months. Some of the current Master Trust providers may withdraw their application during this time, whilst some may actually fail to get through the application process. In the end there may be a Master Trust population as low as 25.
One challenging aspect of authorisation is that the Master Trust provider has to demonstrate financial stability in that it holds sufficient financial reserves to meet the cost if the Master Trust has a triggering event and has to wind up. It is not allowed to dip into member pots.
Some larger Master Trusts, and those whose business plan is to purely develop and compete in the Master Trust arena, are already acquiring a number of the Master Trusts schemes which have not applied for authorisation. These market participants have the appetite, skills and experience to help the exiting schemes wind up and transfer across in an orderly fashion.
From a member perspective the risk around Master Trusts will be reducing for those where a Mater Trust gets authorised, but increasing for those members where the Master Trust fails to get authorisation.
As previously mentioned where a Master Trust fails to get authorisation it will need to wind up. For members this will mean that they will either be moved to another group arrangement or an individual policy. Although the Trustees of the Master Trust winding up will ensure that the members will be no worse off under the new arrangement, there may be investment risk upon transfer to the new arrangement (as the members funds may be out of the investment market for a number of days upon transfer). If the Trustees decide to secure members benefits on wind up in individual plans, the members will then have sole ownership of their policy and there will be no support for them going forward around the monitoring and performance of their investment funds apart from that provided through the provider.
The “secondary market”
We believe that we will see a secondary market emerging for employers, where they consider a review of the workplace pension scheme.
Some employers are already looking to switch pension providers. This may be due to poor investment performance, administrative problems or poor member engagement. One impact of the authorisation process is that employers have had to potentially delay making structural changes to their workplace pension scheme, as the marketplace is waiting to see who comes out the other end of the authorisation process.
Employers should never forget that there is the potential to move from a Master Trust to a contract based group personal pension plan and this may actually be the most appropriate arrangement for the employer going forward.