Aviva’s John Lawson wants mandatory Independent Governance Committees at mastertrusts to watch over “systemically important” trustees
While concern over value-for-money and proper governance has focused on contract-based schemes, master trusts continue to proliferate, arguably without sufficient proper regulatory controls. A recent article in Pensions Insight suggested that there are now as many as 200 master trusts.
The barriers to entering the master trust market are far too low.
Some of the more responsible master trusts are questioning this situation, clearly keen that this market, and their reputation, is not tainted by schemes which are poorly governed, sub-scale and riddled with conflicted interests.
This year, contract-based providers will set up independent governance committees (IGCs) to give employers and employees confidence that the schemes they use for automatic enrolment provide good value and are governed with the members’ best interests at heart. While contract providers have extensive internal governance already, the concern was that governors were not independent.
Exactly the same concern ought to apply to mastertrusts.
Trustees are also likely to be conflicted by their profit motive
Unlike Nest, many have been set up for commercial purposes; to make a profit. This might be a profit on administration or on investment management or on providing advisory services to the trustees. And despite trustees of these schemes having a clear fiduciary duty towards their members, they are also likely to be conflicted by their profit motive.
IGCs, while paid for by the providers that establish them, will also have clear independence. They will report directly to both the Financial Conduct Authority and Pensions Regulator as well as the provider’s own board.
Trustees of some master trusts will not be inclined to report concerns to their only regulator, the Pensions Regulator, because in many cases, that concern might be directly linked to their profit motive. Many of these trustees work for the investment managers or administrators that set them up and who seek to make profit from these operations.
Independent trustees are also on the investment manager’s or administrator’s payroll
While some have appointed ‘independent’ trustees, it should be noted that these independent trustees are also on the investment manager’s or administrator’s payroll and therefore may share the profit motive. No master trust, no independent trustee, no independent trustee fees.
A further concern is the concentration of risk in a handful of independent trustees
A further concern is the concentration of risk in a handful of independent trustees who act as sole or joint trustee for a large number of these master trusts. Given these master trusts have admitted hundreds of thousand of new members, these trustees are now so systemically important that they warrant close and continuous supervision from their regulator.
IGCs should be mandatory for mastertrusts too
Yet this does not appear to be happening.
It is high time that government and regulators turned their attention to this already significant and rapidly growing part of the auto-enrolment market. In my view, IGCs should be mandatory for master trusts too and the sooner this is realised, the better.
John Lawson is head of pensions policy at Aviva