Master trust authorisation: How important is timing?

Last week, the Pensions Regulator revealed that, so far, 30 master trusts have exited or are exiting the market, leaving 58 that will either need to apply for authorisation or exit in the coming months.

Our approach is to take our time to do it thoroughly

Ronnie Taylor, Aegon

The watchdog’s executive director for frontline regulation Nicola Parish said in a statement that the success of auto-enrolment has led to rapid growth in master trusts, adding that “authorisation and supervision is vital to ensure 10m savers can have confidence that their retirement savings are safe”.

The regulator ran a readiness review programme earlier this year, giving master trusts the chance to provide a draft application to the watchdog and receive detailed feedback. The regulator also published general feedback on its website.

Parish said: “We have worked hard to ensure we have been clear about the evidence we require from master trusts to demonstrate they meet the standards laid out in law.”

She added: “It is now up to trustees to review the code of practice and guidance, and submit applications through our portal,” which opened last week.

Raising the bar

Master trust operators that have gone through the readiness review say the level of scrutiny they have been subjected to will protect savers.

Ronnie Taylor, chief distribution officer at Aegon, highlighted “how much [the regulator is] raising the bar on what master trust providers need to do”.

He added: “The level of rigour and thoroughness and analysis that they’re expecting us to go through is probably more significant than we thought – and that’s a good thing.”

He also highlighted the regulator’s focus on the master trust business as a standalone entity.

Some master trusts are standalone, but many are part of bigger organisations. Aegon, for example, has a number of different businesses.

When applying for authorisation, master trusts will have to provide evidence to the regulator in five areas to stay in the market. These include the ‘fit and proper person’ test, financial sustainability, the scheme funder, systems and processes and the continuity strategy.

Ian Digby, head of regulatory affairs at master trust Smart Pension, said: “In the information that we submitted as an organisation and in feedback that I’m getting from competitor businesses, there aren’t really that many surprises coming back.”

He highlighted unexpected difficulties for tech-driven providers with the readiness review process. “It’s very easy to tell somebody you do something and you can outline the process that you follow, but sometimes it’s challenging to supply evidence to support that claim, particularly when you have straight-through processing.”

Master trusts should devote plenty of time

He added that he has no doubt Smart Pension will get authorised. “For an organisation not to get authorised it will be because they either haven’t treated the situation seriously, taken it for granted that they’ll get through it, or not devoted the resource and the time that they need to do it,” he said.

This latter point is crucial. Will there be any competitive advantage to being one of the first master trusts to submit an application?

Richard Butcher, managing director at PTL, said the proposal is to announce authorised master trusts in tranches.

Butcher noted that, currently, there is a bottleneck of employers looking to either move to a master trust or switch master trusts, but are reluctant to do so until they know which providers have been authorised.

“Those who get authorised first will, theoretically, get first bite of that bottle neck,” he said.

“From a marketing perspective, you’d want to be in that first tranche because that will then give you the opportunity to get a slice of this pent-up demand,” Butcher noted.

However, he pointed out that the downside of going for authorisation earlier is that if the master trust does not pay proper attention to their application, they may fail the process.

“We’re hearing that the majority of organisations may be looking at nearer to Christmas [rather than] being first to go through the process,” said Digby.

He added that “if you take your time and you’ve got the planning and the resource in place then there’s no reason why you should fail”.

The regulator stressed in its general feedback document that master trusts should not rush their applications.

Taylor agreed it is about quality, rather than speed. “This is something to do properly, not quickly.”

He said his approach is “to do it thoroughly… we’re unlikely, I think, to put an application in until later this year, or possibly even early next year”.

While some organisations may feel there is an advantage to applying early, “we don’t think that”, Taylor added.

How many more will exit?

While 30 master trusts have exited or are exiting the market, there could be more exits on the horizon.

The application process is going to be challenging for some of the smaller master trusts, Taylor noted.

“I don’t know how many of them will apply, I don’t know how many of them will make it through… but I think you are going to see a number of casualties here.”

Digby said it is surprising that some organisations would not have gone through the readiness review. “That means there are more organisations likely to exit the market than the regulator has alluded to,” he added.