Employers who use a master trust to provide pensions for their employees may need to consult with workers and face challenges to keeping their employees’ pension pots together as the master trust industry faces a shake up from 1 October 2018.
Many employers chose to provide auto enrolment pensions for their workers through a master trust – which is an occupational pension scheme set up and run by a commercial provider, for unconnected employers to join. Some employers felt this was a better option than using a group personal pension plan.
Now, master trusts must apply for (and be granted) authorisation by the Pensions Regulator by April next year - or they must cease to trade. Some have already decided voluntarily to stop operating; at the start of October, over a third of the 88 master trusts in the market had already either wound up or had told the Regulator they were not going to keep operating. The Regulator expects even more of the remaining providers to drop out before the April deadline. There is a lot of uncertainty about who will seek, and who will obtain, authorisation and what will happen to those that don’t make the grade.
Employers who use master trusts that cease to trade will need to find a new pension provider for the future, either another authorised master trust or a group personal pension. This requires consulting for 60 days with affected employees before making the change.
The outgoing provider will be looking to find another master trust to take on its existing funds from past contributions, but there is a risk that a new provider cannot be found, or is unsuitable for some reason. Employees could easily feel disgruntled in this process and this may lead to complaints against the employer for choosing a “bad” provider initially. Communication with employees, during the consultation and afterwards, will be key to make sure the right message is portrayed and that employees do not feel concerned about the safety of their benefits.
How did we get to this point? Auto enrolment was a seismic shift for the pension industry when it was first introduced in 2008 and has led to an enormous increase in the number of workers who are in a pension scheme. For example, participation in workplace pension schemes almost doubled for 22 - 29 year olds.
As a result, a large number of master trusts suddenly appeared in the market, with different levels of investment in infrastructure and varying experience and skill sets in management. The range of employers also proved a challenge, as very small employers, with no HR or payroll capability have not always been able to provide the basic information needed by the master trust to administer the employees’ pensions.
Unsurprisingly, this led to government concerns that master trusts needed to be controlled. A belated attempt to regulate master trusts resulted in the Pension Schemes Act 2017 which required master trusts to become authorised from October 2018 onwards. Those who do not apply before April 2019, or are refused authorisation, must cease to operate. As there is pressure to reduce the number of master trusts it is expected that a large number will not be authorised.
If you are concerned about whether this will affect you, you can check with your pension provider to confirm whether they are a master trust and whether they are intending to seek authorisation.
This article was written by Vikki Massarno (Partner, Arc Pensions).