Tougher rules for master trusts unveiled – industry reaction

The Government has published a list of five new tests master trust pension schemes will need to meet in order to continue operating.

Publishing new master trust regulations today, the Department for Work and Pensions says a new ‘authorisation and supervision regime’ will provide them with equivalent protection to members in other types of pension schemes.

The five key tests are that persons involved in the master trust scheme are fit and proper, that the scheme is financially sustainable, that each scheme funder meets specific requirements in order to provide assurance about their financial situation – including through presenting a business strategy and full, audited accounts, that the administrative and governance systems/processes used in running the scheme are sufficient and that the scheme has an adequate continuity strategy.

Critics have attacked an indication that new market entrants could have a lower cost of entry to the market than existing players.

Under the new regime all current and prospective master trust schemes will need to apply for authorisation to operate in the market. The regulator will also have greater ongoing powers to work with, and if necessary, de-authorise master trusts where they are at risk of failing.

Master trusts will also have to demonstrate on an ongoing basis that they continue to meet the strict authorisation criteria, including demonstrating provisions to ensure member funds are protected in the event of a scheme needing to be wound up.

The master trust market has grown rapidly since 2012. There are currently 87 master trusts, which now represent 90 per cent of savers who have been automatically enrolled into a workplace pension.

The announcement follows the passing of the Pension Scheme Act in April 2017, which introduced this regime proposal. It is expected that the new regulations will come into effect from October 2018.

Minister for pensions and financial inclusion Guy Opperman says: “The majority of master trust pension schemes are operating well, but for too long these schemes have been subject to far less regulatory scrutiny than new contract-based providers.

“Nobody’s savings should be less secure simply because of the pension chosen by their employer. That is why the new authorisation and supervision regime is a significant step forward in bringing master trust and other occupational schemes into line.

“These strict new tests will ensure current and future master trusts are strong, safe and well placed for consumers and employers to invest their pension contributions.”

TPR executive director of frontline regulation Nicola Parish says: “We have been in active discussions with the industry for more than 12 months and will publish a Code of Practice for consultation early next year on how authorisation will work and how the criteria should be met.”

The People’s Pension director of policy Darren Philp says: “Early sight of a draft code will be important for providers, as the new regime comes into effect from October next year and the industry has been invited to let the regulator see early versions of their applications for authorisation.

“One point of detail in the draft regulations that needs more thought are the different fixed caps for the cost of an application, depending on whether the applicant is an established master trust or a new one. The regulation states that the principle for charging is cost-recovery. If this is the case then why do we need two different caps, since there is nothing to stop the regulator charging a new entrant the actual costs of authorisation?

“We would argue that the same rigour and assessment needs to be in place on existing and new master trusts. We might also expect initial supervisory costs of new master trusts to be higher as they should be required to demonstrate to the regulator that they are implementing systems that actually work. From a political perspective, it would be an own goal if a lower bar for review were set for new entrants, as the political impetus behind the Pension Schemes Act was driven by the entrance of low quality, under-capitalised and potentially fraudulent schemes.”

JLT Employee Benefits head of technical John Wilson says: “Master trusts are not necessarily superior in all circumstances and the key to making the right choice for a particular organisation is to start by defining what is important for both employees and employer, and prioritise needs accordingly. Master trusts will remain a prominent feature of the DC pensions landscape and are well placed to take lead when it comes to innovation in areas such as decumulation. Such innovation would be welcome, as the decumulation market is still evolving in response to the introduction of the pension freedoms.”