New legislation designed to give savers using master trust pension schemes greater protection was announced by the government last week. The Pensions Bill will impose new criteria on master trusts - also called multi-employer pension schemes - to address concerns that the schemes are more risky than other types of pensions.
Master trusts are centralised schemes run by pension providers for several companies at the same time. Traditional occupational pensions are provided by an employer for their own staff.
The popularity of master trusts has grown since the start of the government's programme to auto-enrol employees into workplace pensions in 2012. Master trusts are attractive to employers because they allow them to share the cost and governance burden of auto-enrolment.
But earlier this month the Work and Pensions Select Committee raised concerns that the financial protection surrounding master trusts is weak if a provider were to go bust.
"Gaps in pension law and regulation have allowed potentially unstable master trusts on to the market," it said. "Should one of these trusts collapse, there is a very real danger that ordinary scheme members could lose retirement savings."
Gregg McClymont, head of retirement savings at Aberdeen Asset Management and a former shadow pensions minister, welcomes the new rules for master trusts, but says the change is long overdue. "Generally speaking, master trusts are growing fast and there are a lot of small master trusts that at the very least are suboptimal in size, so getting the regulation right is critical," he says.
Mr McClymont says that part of the reason the government has been slow to react to the change in the pensions market is because master trusts had previously mostly been used by small companies. However, since auto-enrolment they have been embraced by a wider range of employers, and as a result new providers have stepped in to meet demand.
He says: "People not in pension schemes tended to be low earners and/or in small companies. It wasn't expected that the market would want to service those non-savers. But it turned out that when the conditions were created by regulation for auto-enrolment the providers did come into that market and, of course, this included the big providers - but also small providers that weren't as well known.
"You now have up to 100 master trusts and the government is concerned, as are large parts of the industry, that the regulation for these trusts simply isn't strong enough."
Problems with the current framework
As things stand, different types of pension are regulated by different bodies. Defined-benefit or final-salary workplace pensions run by employers for their own staff are regulated by the Pensions Regulator. Contract-based schemes, also known as group personal pensions (GPP), provided by a financial company on behalf of a single employer are regulated by the Financial Conduct Authority (FCA).
Members of contract-based schemes are protected by the Financial Services Compensation Scheme (FSCS), which will reimburse them with up to £50,000 if their pension provider goes bust. Holders of defined-benefit schemes that are members of the Pension Protection Fund are also entitled to receive compensation should their scheme collapse. A recent example is the British Home Stores pensions scheme which has a deficit of £570m and may be bailed out by the Pension Protection Fund.
Master trusts fall somewhere between this regulatory structure, as they are technically occupational pensions but are run like contract-based schemes. Currently, this means savers would not be directly covered by any financial compensation scheme if their master trust provider were to go bust.
"The contract side is much more heavily regulated," says Mr McClymont. "We're trying to rebuild confidence in pensions saving. We want to make sure that the auto-enrolment system is robust."
He thinks the new law is a step in the right direction towards rebuilding confidence in the system, but says a lot will depend on the detail of the final legislation.
Tom McPhail, head of retirement policy at Hargreaves Lansdown, also broadly welcomes the measures to strengthen pension regulation, but says more needs to be done.
In particular, he is concerned that the £300bn deficit run up by final-salary pension schemes may cause problems for companies and their employees in the future.
"One of the things that worries me is that the majority of UK pension schemes are heavily in deficit and currently the Pensions Regulator has relatively few resources to manage this problem. It has only a few hundred staff, doesn't have huge investigatory powers or significant powers to intervene."
He hopes the government will devote more resources to strengthening the Pensions Regulator, but also suggests merging it with the FCA.
"We have a slightly odd regulatory structure that is always playing catch-up to some degree because society, economics and the market all move fast, and regulation and legislation have to try to keep up with that," he says.
"Ultimately, there are too many pension schemes in the UK and arguably too many regulators. There are thousands of final-salary schemes, tens of thousands of money-purchase schemes, and dozens of master trust and Sipp [self-invested personal pension] providers, some of which may not be sustainable in the long term."
Given the fast-changing environment of the pensions world, what can savers do to stay on top of developments and protect their money?
Mr McPhail says: "You need to take an interest in how much you're saving, how it interacts with all your finances, when you might be able to afford to retire and where your money's invested.
"Another question to ask is: who is managing my pension, who's looking after it and where exactly is that money? In particular, if you've got a workplace scheme it's no bad thing to try to find out what that workplace scheme is. Is it a National Employment Savings Trust (NEST) scheme, a group personal pension or a master trust? And who's administering it? The more you know about this the better able you are to manage your retirement planning."
