Ministers fear trusts running workplace pensions for millions of retirement savers could go bust taking their money with them.
Pensions minister Ros Altmann is concerned that many master trusts running auto-enrolment schemes are too small to survive a financial battering.
She wants the government to pass new laws to safeguard pension savings held by the trusts.
Master trusts have found favour with employers with 30 or less workers setting up auto-enrolment schemes.
A trust is a pension provider offering managed pension services to several employers at once.
Only five kite mark schemes
Around 80 trusts run auto enrolment schemes for employers, but only five have The Pension Regulator’s kite mark – NEST, Now, Pensions, SEI Master Trust, The People’s Pension and Welplan.
However, only retirement savings in a contract-based pension are protected by the Financial Services Compensation Scheme, which safeguards the first £50,000 of cash in a pension fund.
The minister says the risk is most master trusts do not protect savings and many do not raise enough contributions to make them commercially viable, increasing the chances that they will fold.
HM Revenue and Customs has already ordered more than 40 firms to switch trusts because the trust they were using was saving in unapproved investments.
Master trusts walk a fine line between profitability while offering investments that perform well and minimal charges.
Government taken by surprise
“Pension savers need legal safeguards because they fall between two schemes at the moment and are not covered by either,” said Altmann.
“I am pushing for time in Parliament to bring this law forward.”
MPs sitting on the Work and Pensions Select Committee quizzing Altman about the trusts and auto-enrolment asked why consumer safeguards was not written into the original legislation.
They were told by the Department of Work and Pensions that the measure was overlooked because civil servants had not realised so many master trusts would set up to manage workplace pensions.
Auto-enrolment started in 2012, but starts rolling out to the smallest employers over the next 36 months.
The scheme calls for around 1.8 million employers and millions of employees to start making pension contributions. Most of these businesses are too small to run their own pensions, so are likely to outsource the job to a master trust.