Master trust regulation looking more likely following Work and Pensions Committee intervention, says expert

The committee, chaired by Labour MP Frank Field, has written to the government calling for the inclusion of a new Pensions Bill as part of its legislative programme for the coming year (1-page / 81KB PDF), which will be set out in the Queen's Speech at the state opening of parliament on Wednesday. The purpose of this bill would be to "address gaps in the regulatory framework that have allowed potentially unstable master trusts onto the market", as well as revisit the range and effectiveness of the Pensions Regulator's powers over occupational pension funds.

In its report, the committee warned that the growth of poorly regulated master trust arrangements had the potential to undermine the "success story" of automatic enrolment, putting newly-enrolled pension savers at risk of losing their retirement savings. It also suggested that the new 'lifetime ISA' (LISA), announced by the government at the 2016 Budget, could create confusion and "distract" from the ultimate policy aim of getting more people to save more for their retirement, pointing out that the product would not attract employer contributions.

Pensions experts at Pinsent Masons, the law firm behind Out-Law.com, said that the government was right to focus on proper regulation for master trusts, but added that "weaknesses" in the regulatory framework were only part of the picture. Low contribution rates and alternative savings vehicles could also undermine the impact automatic enrolment had had on increasing pension saving, they said.

"One threat on the relatively short term horizon is the increase to 'steady-state' contribution rates," said Tom Barton of Pinsent Masons. "Workers have tended, overwhelmingly, to stay 'in' so far once automatically enrolled, but in many cases they are paying only 1% of their earnings towards a pension. Once workers start paying 5% of their earnings, or more, into a pension this may well have an impact on opt-out rates."

"Another potential threat is the LISA. Saving into a familiar, ISA-style vehicle might be attractive, especially since the money isn't locked up and indeed can be used in a tax efficient way for the first really big expense a saver will have to shell out for: their first house. The threat might be resolved if the policymakers allow employers to auto-enrol workers directly into LISAs instead of pension schemes – however, this will be a departure from the policy objectives of automatic enrolment. Employers need to think carefully about whether and what role LISAs can play for them, before ditching pensions altogether," he said.

Automatic enrolment, which began for the largest employers in October 2012, has so far accounted for an additional 6.1 million people enrolled in a workplace pension and saving towards their retirement for the first time, according to the Work and Pensions Committee. However the saving regime, which was applied to the largest employers first, has now reached a "crucial and risky stage of its development", with up to 1.8 million small and micro-employers due to automatically enrol eligible workers into a suitable workplace pension scheme by April 2017.

Many of these smaller employers, which do not necessarily have the resources to operate a pension scheme of their own, have opted for a master trust pension scheme, which enable providers to manage a defined contribution (DC) scheme for several unconnected employers under a single trust arrangement. However, these arrangements can be subject to less regulatory scrutiny than contract-based pension schemes regulated by the Financial Conduct Authority (FCA). Of the 72 master trusts currently open to new members, only nine have obtained voluntary assurance of their quality against the framework published by the Pensions Regulator, which regulates occupational pension schemes.

In February, Treasury secretary Harriet Baldwin told a House of Commons committee that the government would bring in new regulations for master trusts as part of "the first appropriate vehicle" to receive full parliamentary scrutiny, in response to press reports about poorly regulated master trust arrangements. Pensions expert Mark Baker of Pinsent Masons said that one way the government could seek to do this could be to make obtaining independent master trust assurance compulsory.

"If the [Department of Work and Pensions] does introduce legislation then it will need to come up with a cleverly designed system that covers the range of different providers, including those that are regulated by the FCA and those that are not," he said. "Its main focus should be on introducing a structure that ensures providers will be able to pay the costs of any winding up or transfer, rather than a risk of the costs being paid from members' accounts."

One of the biggest issues related to master trusts that the committee highlighted in its report was the lack of clarity under the current rules over the extent to which an employer would be liable should a master trust, or any of the investment decisions made by that trust, fail. This also had the potential to undermine the "wider faith" in automatic enrolment, it said.

The government should provide smaller employers approaching their staging dates with more clarity about the legal position, as well as revise its current marketing campaign to focus more on "the financial consequences of non-compliance" for employers, the committee said. It heard evidence that the current campaign, which is based around a "giant psychedelically decorated furry creature called Workie", gave the impression that automatic enrolment was "soft and fluffy and in some way optional".

HM Revenue and Customs (HMRC) and the government also needed to do more to make it easier for small businesses to comply with the regulations, the committee said in its report. In particular, they should expand the existing Basic PAYE Tools software to support automatic enrolment in order to make it "as easy as possible for small businesses to participate without additional cost", the committee said.