About a quarter of a type of pension scheme popular with workplace savers will quit the market ahead of strict rules that come into force in October.
“Master trusts” are pension schemes that allow employers to save costs by pooling workplace schemes into a fund managed by one provider.
Today’s market has 10m master trust members, up from 200,000 in 2012. The rapid increase has been caused by the requirement for employers to automatically enrol staff into workplace pensions.
The market is heading for a shakeout as the new rules take effect. Providers running master trusts will have to pass tests to ensure they are fit and proper, and have a financial plan and IT and governance processes.
In the run-up to authorisation, the Pensions Regulator has said about a quarter of the 90 master trust providers, or 21 schemes, will be wound up. The remaining 69 master trusts are expected to apply for authorisation or leave the market.
“We anticipate more schemes will leave the market before the authorisation window closes in April,” the regulator said. “Authorisation will increase the quality of master trust producers and providers and therefore increase protections for members.”
The biggest schemes, including Nest, Now Pensions and the People’s Pension, are expected to apply for authorisation. They have 6m members between them.
The Pensions Regulator estimated that about 0.5 per cent of all members of master trusts were in the 21 schemes set to exit the market. Financial Times analysis suggests this could be about 50,000 members.
A master trust that chooses to leave the market has to select another provider to take on its members. The regulator oversees the process to ensure workers are not moved to a poorer-value scheme.
The changes have led to concerns that members will not be adequately protected, especially with regard to higher charges and record-keeping.
Charging structures vary widely across master trusts, with annual fund fees ranging from 0.31 per cent to 0.75 per cent, the maximum set by the government for automatically enrolled workers.
“The protections are not currently strong enough for members and that is why they are introducing an authorisation regime,” said Ros Altmann, former pensions minister. “This is a serious issue, as I expect the number of providers in the market to halve.”
Baroness Altmann had particular concerns over the accuracy of member contributions. Only from October will schemes have to demonstrate that their IT systems allow for proper administration and governance.
“A significant proportion of contributions made are simply incorrectly recorded,” she said. “I would ask the regulator what they are doing to ensure that contribution records are correct.”
In June the Pensions Regulator announced it had imposed a £15,000 fine on the trustees of autoenrolment.co.uk, a master trust, for failing to report that £900,000 of contributions had not been paid by employers, or to tell members about the problem.