Workplace pensions: In praise of the humble master trust
I woke up this weekend to a series of vaguely apocalyptic headlines about workplace pensions, master trusts in particular.
And today none other than the country's most revered pensioner, Her Majesty The Queen, has opined on the topic. Being managing director of Smart Pension, a provider of workplace pensions via our own secure master trust, I must speak up on behalf of the humble master trust.
Master trusts allow many workplace pensions to be set up using a single legal structure, making them very cost-efficient and thus suited to smaller employers' limited budgets.
In addition, they allow providers to aggregate demand and negotiate competitive costs for investments. Finally, a master trust is ringfenced and protects underlying funds. So far so good. So good, in fact, that the government's own workplace pension offering, Nest, is set up as a master trust.
Obviously, good governance is needed too, such as firewalling investment management from administration, strong underlying FSCS-protected funds, and experienced, independent trustees. Sustainability is also key. But how to identify such a well-governed provider?
Various kitemarks exist – "master trust assurance" accreditation, which we have, being foremost amongst them. Her Majesty's speech indicates that MAF will become compulsory. Good. We also expect provision will need to be made for an orderly wind-down of a master trust, something we also welcome.
However, it's not just the legal structure or a kite mark that matters; there's also the cost to the actual customers in all this, the employer and their employees. How employers and employees interact with their workplace pension is a crucial driver of cost and, thus, pricing.
That's where technology and fleetness of foot come in. As auto enrolment reaches smaller employers, many big providers have exited the market (or deliberately priced themselves out) and nearly all participants now charge employers to set up a workplace pension.
Traditional providers simply cannot afford to service smaller employers due to antiquated technology and manual processes, so small firms are being asked to pay hundreds or thousands of pounds to set up a pension, in addition to their contributions to employees' pensions. Employers can use Nest (which is free for employers, like we are) but it's poor value for employees due to Nest's requirement to repay, out of member fees, its whopping government loan (currently sitting at c £400m).
This is where nimbler players can help and why they should be nurtured. Creating a cost efficient master trust and building technology specifically for auto enrolment means such players can drive down costs and administration for the UK's employers while helping employees provide for a better retirement.
Yes, master trusts should be regulated properly. Yes, they must demonstrate sustainability. But innovation and entrepreneurship will be what will give workplace pensions a long-term future, so we must ensure they are also looked after and encouraged. They are the future.