FCA more effective than TPR at regulating for-profit providers – PPI

Profit-motivated pension providers would be more effectively regulated by the Financial Conduct Authority than the Pensions Regulator, which does not have the same powers to address conflicts of interest, competition and market integrity, a new Pensions Policy Institute report claims.

Published today, the report, Comparison of DC Pension Regulators, says the contract-based regime is more effective in ensuring providers do not put other objectives ahead of providing a pension to members. It highlights potential risks from bundled solutions offered by vertically-integrated providers and advisers operating in the trust-based sector. The trust-based regime can however offer effective regulation of providers whose primary motivation is around providing a benefit to workers, such as in a single employer trust-based pension scheme or large not-for-profit scheme can be effectively regulated under the trust-based regime, the report says.

The hard-hitting report, commissioned by Scottish Widows, says ‘where there may be conflicting commercial objectives, such as profit- making, the FCA regime may be more effective, in terms of working towards better outcomes for the pension member, by ensuring that organisations do not pursue other objectives at the expense of scheme members’.

It says the FCA has additional responsibilities around integrity and competition that extend beyond the responsibilities it shares with The Pensions Regulator. Authorisation and monitoring by the FCA are more stringent than conditions around a master trust, the report continues, with the FCA regime designed to prevent negative events while the trust-based regime addresses them after the event.
The report raises concerns around lack of conditions to entry to the trust-based regime, highlighting the possibility of the winding up of some master trusts, particularly where they do not achieve the necessary scale for automatic enrolment.

It highlights the very low barriers to entry to the master trust market, which it say currently numbers 70 providers, compared to the GPP market has around 21 active providers.

The report says this lack of conditions to starting a master trust contrasts with the FCA’s regulations which require that GPPs meet threshold conditions, including solvency conditions, in order to commence operating.

It also highlights concerns that boards of trustees will not feel able to appoint investment managers other than those linked to the adviser or provider that has sponsored the master trust. It says ‘while a recent change in regulations by the DWP was introduced to ensure that trustees are not locked in by providers or advisers to in-house administration or investment services, some trustees may not choose to exercise this choice’.

But it does add that new regulations and the introduction of the non-mandatory Master Trust Assurance Framework represent a move towards a more stringent approach for trust-based pensions.

The report says a lack of transparency may lead to worse outcomes for some pension savers, under both regimes, and that TPR, in particular, has no remit to protect the integrity of the market.

It goes on to say that while competing views exist around whether there should be a single regulator, there is a consensus that combining the regulators would not be straightforward.

The FCA regime requires providers to meet threshold conditions, such as an appropriate level of resources to be authorised to conduct regulated activities. It requires supervision entailing on-going engagement between the firm or individual and much of the FCA’s approach, such as threshold conditions around adequacy of resources for investment managers, is driven by European legislation.

A Master Trust can be set up with a minimum of only three trustees, provided that the majority are independent of the provider of the scheme. Trustees are responsible for the supervisory function, including protection of members’ assets.

PPI senior policy researcher Melissa Echalier says: “Comparison of the regulatory regimes is difficult as they reflect different models of pension of provision that have developed over many years. However, the implementation of automatic enrolment in which trust and contract-based pensions have been used for similar groups brings into contrast the two regulatory regimes and it is clear that they both have strengths that could helpfully be used by the other regulator.”

A spokesperson for The Pensions Regulator says: ”Existing legislative and regulatory requirements mean that the barriers to set up a trust-based scheme like a master trust are different to those required from providers of contract-based schemes such as GPPs.
“We are working with Government and other regulators to help ensure an appropriate level of protection across both types of scheme. As part of our discussions with Government, we are looking at how else we can ensure master trusts deliver good member outcomes.”   

Scottish Widows Pete Glancy says: “If the sole purpose of your organisation is running a pension share scheme for the benefit of members, then the Pensions Regulator is fine. But if you are a profit based organisation and you’ve got to look both to the interests of shareholders and manage the conflicts that come in between profits and outcomes, then the FCA is the right organisation.

“Profit-oriented organisations should be regulated by the FCA, or the Pensions Regulator should be given powers that extend to dealing with those issues covered by the FCA including market integrity, competition, conflicts of interest and the clear balance between the profit motive and the member outcomes.

Regulated providers have to have solvency requirements so there is some money there if things go wrong. If trust based providers get into trouble then the people paying to get out of to sort things that are going to be the trustees or the employers.

“We also think that where there is a group pension scheme, or a group Isa arrangement, a lot of the regulation coming from the FCA could be done away with. Much of the product disclosure and comparison is not necessary, because you already have the product.

“And a point that the report did not make is that regulated providers have to have solvency requirements so there is some money there if things go wrong. If trust-based providers get into trouble then the people paying to get out of to sort things that are going to be the trustees or the employers.”

Choice of master trust or GPP – PPI

Criteria Master Trust GPP

Employers’ objectives for pension provision

May be more suitable for employers who do not expect their employees to exercise choice around their pension scheme.

May be more suitable for employers who would like their workers to take responsibility for their retirement savings. As GPPs provide individuals with more tailored information as they approach retirement, in particular, this regime may help those in making choices about the management of their savings.

However, to fully support those wishing to make personal choices, employers may need to put in place additional measures such as communications.



Charges for the default fund used for automatic enrolment are subject to the charge cap. However, employers should take into account other charges, such as transaction charges and charges payable by the employer.

Value for money


Any costs should be weighed against benefits provided by the scheme; these could be in terms of areas such as quality of employee communications and management of funds.


Governance structures

Rules provide for Master Trusts to aspire to excellent governance structures that have a knock-on effect on areas such as quality of investments and administration. However, this depends on having knowledgeable and conscientious trustees.

Regulations are in place and the FCA supervises GPPs to ensure that they do not profit unfairly at the expense of pension members.

Safeguarding of any assets


The trust-based regime, under which action may only take place after an adverse event, may be less effecting at avoiding adverse events.

The more pro-active FCA regime may be more effective at avoiding adverse events.