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Pension Schemes Bill and Master Trusts

The Pension Schemes Bill gets its second reading in the House of Commons today, narrowly avoiding being knocked off schedule by the European Union (Notification of Withdrawal) Bill.

  • What’s in the Pension Schemes Bill
  • What is the point of Master Trust schemes

The Bill

The Pension Schemes Bill will introduce new regulatory protection measures for Master Trust scheme members. Policymakers were wrong-footed by the rapid growth in the use of Master Trusts (of which NEST is the most high profile) in response to Auto-enrolment; there are now around 84 Master Trusts in the UK. Some of these schemes are very small, with only a few thousand or even just a few hundred members. There are concerns that some of these schemes may not be sustainable and that without regulatory intervention, scheme members could end up losing some or even all of their retirement savings. The Bill will impose requirements on the administrators of Master Trusts for registration of such schemes and for their ongoing operation; it will apply to all existing Master Trusts.

It will also introduce a statutory override ensuring that members of Occupational Pension Scheme members over the age of 55 who wish to access their pension flexibly under the pension freedoms introduced in 2015, will be able to do so without suffering an exit penalty of more than 1% of their fund value. This brings Occupational Schemes in line with individual pensions, which already have in place a similar ban, imposed by the FCA.

So what are Master Trusts good for?

The over-riding virtue of Master Trusts is that they give employers a simple mass-market solution to meeting their auto-enrolment obligations. Companies like NEST, NOW Pensions, Legal & General and the People’s Pension have created a relatively straightforward sign-up process, allowing an employer to cover off all their workplace pension needs.

The downside of Master Trusts is that they tend to adopt a one-size fits all approach to employee engagement. This is likely to emerge as an increasing problem as time goes on. Defined Contribution pensions are an individual savings account which allow an individual to make long term investments for their retirement whilst benefiting from generous tax breaks.

The key factors which will determine how well an employee does out of their pension are:

  • How much they pay in
  • How well their investments grow
  • The retirement income decisions they make in later life

All of these three factors are heavily dependent on the decisions which individual employees make. Unless they are engaged with their pension and actively planning their retirement the chances of good outcomes are severely reduced. A good member engagement programme is therefore essential to delivering good retirement incomes.

As part of the Auto-enrolment review, Hargreaves Lansdown would like to see employees being given the option to choose their own workplace pension, thereby allowing them to take ownership of their own retirement saving, whilst continuing to benefit from their employer’s (or employers’) contributions.