A report by the work and pensions select committee describes auto enrolment as a ‘tremendous success’, but says gaps in pension regulation have allowed potentially unstable master trusts onto the market. As a result, employers may unwittingly be putting their scheme members at risk of losing their retirement savings.

Risks of master trusts collapse

The committee also maintains there is not enough clarity about employers’ liability if one of these master trusts were to collapse, or if any chosen pension fund fails.

There are around 72 registered master trusts that are currently open. In its report, the committee said it had heard evidence of ‘various concerns that TPR’s regulatory powers with regards to master trusts are insufficiently robust.’

These focused on the difference between the Financial Conduct Authority’s (FCA’s) standards for assessing the capital and solvency requirements of contract-based pension providers and their ongoing monitoring, and the arrangements that apply to master trusts. 

The Association of British Insurers (ABI) gave evidence of ‘lower standards for the specificity of risk warnings and the provision of communications to members for trust-based schemes’, while The Pension Regulator (TPR) acknowledged that some of the smaller master trusts ‘may not be run by competent people.’

An executive director at TPR, acknowledged that there was a risk of some of the schemes collapsing and members losing their savings.

The committee said that inadequate regulation increases the prospect of ‘substandard governance and investment strategies’, which could make poor investment returns for scheme members. A proliferation of poorly-governed master trusts would also limit their ability to become large in scale, undermining their ability to provide cost-effective retirement saving.

The TPR told the committee that while a master trust assurance (MTA) framework, developed with ICAEW, was working well in signposting employers to schemes which demonstrate adequate standards of governance and administration, accreditation is voluntary and just nine master trusts have signed up so far. 

The regulator wants a new pensions bill giving TPR the power to enforce minimum financial and governance standards for market entry for master trusts; ongoing requirements for master trust schemes, which might include making compliance with the MTA framework mandatory; and measures to protect member assets in the event of a master trust winding up.

Frank Field, chair of the committee, said: ‘Auto enrolment has been a tremendous success that will ultimately see approximately nine million people newly saving, or saving more, in a pension. Crucially now we must do much more to ensure that people’s savings are put in the best possible place, and are secure.

‘To this end, we greatly look forward to seeing a pension bill in the Queen’s Speech this week. This is what we and others have been calling for.’

The committee also flagged up concerns about adequate support from government for the final stage of auto enrolment, which will see 1.8m small and micro employers brought on board.

MPs said the publicity campaign, which features ‘Workie’ should now focus on the financial consequences of non-compliance, emphasising that auto enrolment cannot be ignored. The Department for Work and Pensions (DWP) should also provide reassurance to small and micro-employers about where liability will fall if their chosen pension scheme performs badly or fail.

HMRC criticised

The report is critical of HMRC’s decision not to develop the HMRC basic PAYE tools (BPT) to support auto enrolment, which it says was a mistake.

It states: ‘The BPT are trusted by small and micro employers, many of whom will not be able or willing to use commercially available software. TPR has acknowledged that small and micro employers need automated support to cope with auto enrolment. Its solution has been to build an entirely separate Basic Assessment Tool that has limited functionality and cannot send information to pension providers. This risks undermining auto enrolment.’

The report calls for DWP to work with HMRC to expand BPT to support small businesses in meeting their automatic enrolment obligations, in particular ensuring that it is easy for small businesses to participate without additional cost or the need to either outsource the payroll function or buy proprietary software.

In addition, the committee’s report raised concerns that the new lifetime ISA (LISA) could distract from auto enrolment, employees potentially opting out of their workplace scheme to put savings into this vehicle which is being introduced at a time when the majority of small businesses are still to move on to auto enrolment and statutory contribution rates are yet to rise.

It says the government has been sending ‘mixed messages’ about the best way to save for retirement and should conduct urgent research on any effect of the LISA on auto enrolment and report on this before the 2016 Autumn statement.

The report is here