The government has set out draft regulations for defined contribution mastertrusts, estimating that the rules will cut the number of mastertrusts to about 56 from currently 87.
The Pensions Regulator has previously voiced concerns over the low barriers to entry in the mastertrust market. Worries about the financial stability of some mastertrusts eventually led to the government’s decision to introduce a specific authorisation and supervisory regime.
There is time, but trustees have to sign off on the documents so they’ll need reassurance on who will do the work and what the timescales will be
Mark Baker, Pinsent Masons
TPR to use five criteria to assess mastertrusts
On Thursday, the Department for Work and Pensions delivered the draft regulations, which support the Pension Schemes Act 2017 passed in April. Under the new regime, all new and existing mastertrusts will have to apply for authorisation, and will be subject to more scrutiny. The consultation document says the regulator will use five criteria in assessing mastertrusts:
The persons involved in the scheme are fit and proper persons.
The scheme is financially sustainable.
Each scheme funder meets specific requirements.
The systems and processes used in running the scheme are sufficient to ensure it is run effectively.
The scheme has an adequate continuity strategy.
Mastertrusts will also have to prove member benefits are protected in the event of a wind-up.
The regulator will support schemes with operational guidance and a code of practice, with the latter subject to a separate consultation. The code of practice will be available early next year.
The regulations are expected to come into force in October next year, six years after auto-enrolment was introduced.
In a statement, pensions and financial inclusion minister Guy Opperman said: “The majority of mastertrust pension schemes are operating well, but for too long these schemes have been subject to far less regulatory scrutiny than new contract-based providers.”
DC mastertrusts started to spring up in the wake of auto-enrolment, offering a multi-employer pension solution for businesses.
The DWP said there are 87 mastertrusts, providing pensions to 90 per cent of those auto-enrolled. It said these trusts might consolidate to 56 or 57 – an accompanying document cites both numbers at different points – with the strict new rules coming in, although “this will be heavily dependent on individual schemes’ reaction to the authorisation regime”.
Industry welcomes tough regime
Experts welcomed the draft regulations. Steve Webb, director of policy at provider Royal London and former pensions minister, said the government was right to seek to tackle the risk of some members having poor outcomes, “rather than wait for a series of mastertrust failures”.
He praised the five criteria set out in the consultation. “In particular, the requirement to be run by ‘fit and proper persons’ and to be ‘financially sustainable’ are absolutely fundamental. If schemes cannot satisfy these two tests then they really shouldn’t be in business,” he said.
Details on the requirements for mastertrusts will be in the regulator’s code of practice, but there are already steps to be taken now, said Mark Baker, legal director for law firm Pinsent Masons.
He advised trustees to start speaking with their provider over the next few weeks and decide who on the mastertrust side will do the work, what the timescales will be, and how the trustees are kept updated between meetings.
“There is time, but trustees have to sign off on the documents so they’ll need that reassurance,” he said.
Financial details need to be clarified
The new rules aim to avoid members experiencing any financial loss in case of a wind-up, but it is still not entirely clear whose legal obligation it is to bear the cost of winding up, said Helen Ball, partner at law firm Sackers.
Cracks show over member involvement as MPs debate mastertrusts
As the pension schemes bill on tougher mastertrust regulation passed through parliament earlier this year, some called for making member involvement in mastertrust governance mandatory.
“It would be the scheme funder but [the draft regulations] also acknowledge that not everybody has a scheme funder,” she said, adding: “It’s a bit woolly.” She speculated the regulator might be relying on mastertrusts trying to avoid reputational damage.
Ball also noted that there are to date no figures on how much of a capital buffer mastertrusts will be required to hold for any wind-ups, but this might be included in the code of practice and guidance still to be published.
Market expected to shrink in next 12 months
One of the main objectives of the new regulations is to protect savers’ assets if a mastertrust fails.
Baker predicted more savers will be moved from unsustainable to sustainable trusts between now and October as consolidation plays out.
“It’s a lot of effort to get these transfers pushed through between now and next October, but TPR has a strong interest in making them work,” he said.
