Pensions bill boosts mastertrust governance

Since it was announced in the Queen's Speech earlier this year, the pensions bill was anticipated to include tough new rules for mastertrusts, an area that has long been seen as too lightly regulated.

The new legislation, which received its first reading in the House of Lords without warning key industry players, identifies five key criteria mastertrusts will have to meet by law.

'Fit and proper'

Persons involved in the scheme must be “fit and proper”, and the scheme must be financially sustainable and be able to provide assurance of this. Schemes must also have an “adequate continuity strategy” and systems and processes appropriate to deal with their governance and administration requirements.

We couldn’t believe it when we came in and they said that there were no requirements and no authorisation

Morten Nilsson, Now Pensions

“It’s simply a consumer protection item,” said pensions minister Richard Harrington at the Pensions and Lifetime Savings Association’s Annual Conference in Liverpool on Wednesday. “We can’t have a system where some pension schemes are more regulated than others.”

For its part, the PLSA has welcomed the proposed legislation but argued that it needs robust scrutiny. The association has also set up a mastertrust committee to look into issues with the sector.

That sentiment was echoed by industry figures, who welcomed the boost in provision of value for members that consolidation could bring about.

Consolidation was not explicitly mentioned in the bill, but experts said the tighter regulation would aim to flush out those mastertrusts that do not provide an adequate service.

Otto Thoresen, trustee chair of government-backed mastertrust Nest, said: “The potential for the mastertrust community to start delivering real economies of scale and significant advancements in value is huge.”

Reputational risk

The introduction of regulation could also shore up the reputation of mastertrusts, which Now Pensions chief executive Morten Nilsson said he felt has been dragged down by the lack of governance standards.

“We couldn’t believe it when we came in and they said that there were no requirements and no authorisation, you didn’t have to have any capital, you didn’t have to have any skills, you can just take people’s money. It just seemed wrong.”

However, queries were also raised about the details not included in the legislation, which are expected to be clarified in regulation at a later date.

Matthew Giles, partner at law firm Squire Patton Boggs, said that the wide definition of mastertrusts included in the bill might capture schemes designed to serve workers from a particular industry, often set up by trade bodies.

“The new requirements would apply unnecessary additional burdens to those arrangements and add to the red tape, which is already weighing down on them,” he said.

Is your capital adequate?

One key requirement hinted at by the bill is the introduction of capital adequacy requirements, designed to ensure members do not pay for the decision of a sponsor to leave the market.

The move was again welcomed, but questions remain over what the level of capital should be, and whether the requirement is expressed as a minimum amount, an amount related to operating and winding-up costs, or a combination of both.

Also unclear is who would have to hold this capital, as Richard Butcher, managing director at professional trustee company PTL, observed.

“Who’s going to hold that capital adequacy? Is that capital adequacy of the sponsor – and if the sponsor, how’s that money ringfenced, or is the capital adequacy held within the scheme?” 

Consolidation - in an orderly fashion

One consequence of the bill could be consolidation within the mastertrust sector, an aim repeatedly cited by the Pensions Regulator. Currently there are between 70 and 104 such schemes in the UK, depending on the definition used.

“If you look at some of these schemes, some of them have just been local brokers who’ve got handfuls of clients, or they’ve got lots of small clients,” said Kevin Wesbroom, senior partner at consultancy Aon Hewitt.

He said that, as such schemes are not economically viable, larger commercial mastertrusts might not be interested in absorbing them. Butcher expected the regulator to act as a broker in these circumstances.

“There should be an answer and the industry will need to pull together to make it an answer,” said Tony Britton, Aon Hewitt's head of defined contribution DCS sales. “The key bit is that the mastertrust itself might not make sense but it’s the orderly movement of those people [without incurring member costs] into one that does make sense.”