Back in Colonial times, the British rulers of India decided that there were too many cobra snakes roaming free in Delhi.
So, they set a bounty for every dead cobra.
Initially, this led to a reduction in the number of snakes. However, people started breeding them in order to collect the financial reward.
When the government became aware, it cancelled the bounty programme – and cobra-breeders set free their snakes, leading to an overall rise in the number of cobras in Delhi.
This possibly apocryphal story¹ is a great example of the Law of Unintended Consequences – which states that people’s actions, and even more so government’s actions, always have unexpected results.
Here’s an example from the pensions industry.
Under the Pensions Act 2008, every employer in the UK must put certain staff into a workplace pension scheme and contribute towards it.
Auto-enrolment (AE) was meant to help regular people save towards their pensions, and provide them with more financial security in their old age.
To protect consumers, Group Personal Pensions are highly regulated and the barriers to running a scheme are very high indeed.
But there was a consequence which was not foreseen….
….and that was a huge rise in the number of Master Trusts.
This is where a board of trustees oversees several schemes from different employers at the same time.
Because these were uncommon, they were very loosely regulated, and so relatively easy to set up. And with so many people requiring pensions under AE, and so many companies having to take on additional responsibilities around pensions, there was a natural demand.
So, providers jumped at the opportunity.
The Pensions Regulator’s 2016 – 2017 data shows that there were 87 Master Trusts registered² , with around 7 million members.
Now, some of these are highly attractive, solid trusts, which do a great job for their members – both companies and individuals.
We, for example, have our own Master Trust, which I will tell you more about over the next few weeks. It’s a highly efficient way for companies to administer their pension schemes, whilst shifting all the responsibility and stress onto our trustees.
And we have Master Trust Assurance accreditation from the regulator, showing that our standards of governance and administration meet the DC code.
But less than 30 Master Trusts have this voluntary accreditation³, and some would doubtless not qualify.
The proliferation in numbers meant that some schemes are too small to operate effectively, for example failing to attract enough assets.
As a result, there is an increasingly popular corner of the pensions world where consumers are not as well protected as they could be – hardly the consequence that those who conceived of Auto-enrolment were aiming for.
And so, the regulator has decided to step in.
In October, it will launch a six-month window for all Master Trusts to apply for obligatory authorisation. Those that receive authorisation will essentially have its seal of approval. Those that do not apply, or do not get their authorisation, will have to close.
What does this mean for the industry….?
According to reports, just 33 Master Trusts have applied for authorisation so far, including our own. So, over the coming months, you can expect to see some consolidation amongst Master Trusts, as some shut their doors or are taken over by others.
Those that survive the process should emerge stronger, safer, more reliable and more effective both for consumers and the companies that use them. They should become a far more exciting proposition and as a result, an even more popular choice than they already are.
So, you can expect to hear a lot more about Master Trusts in 2019.
That’s my prediction and I’m standing by it – although we’ll see what the Law of Unintended Consequences throws up 😊