I am a huge fan of master trusts, but I have been calling for a tougher regime for the regulation of master trusts since I joined The Pensions Regulator (TPR) in 2013 – and some of my colleagues in Brighton have been calling for it for much longer than that.
So how can I say I am a fan of master trusts but be calling for tougher regulation at the same time?
Master trusts have proved their worth in successful defined contribution (DC) provision elsewhere in the world, notably in Australia. They offer consumers the benefits associated with high standards of governance and administration, professional scheme management, economies of scale for both administration and investment management, and leading edge communications tools.
They also have the potential to offer members a seamless, guided transition from accumulation into decumulation within the scheme – something I believe is of huge importance in the new environment of ‘pension flexibilities’ in the UK.
But there are problems. There are virtually no barriers to market entry in the UK. This has led to some people setting up master trusts who, frankly, are less than competent to run a pension scheme, or who have dubious motives.
TPR has also found schemes where there were significant issues with financial security and conflicts of interest, as well as business plans that were just not credible. Additionally, there’s a high risk of members’ pots being swallowed up in the event of a trust falling over and having to be wound up.
Another major concern is employers who had chosen a master trust for the purposes of fulfilling their automatic enrolment duties finding themselves in breach of those duties if the trust closes to new business.
The current position could damage the confidence employers and savers have in master trusts and indeed the wider public trust in the security of the pensions system. So there is a clear need for a tougher regulatory regime to protect the interests of both employers and consumers – and the new bill hits that nail directly on the head.
New and existing master trusts will now be required to be authorised by TPR based upon certain criteria being met. These include the fitness, propriety and integrity of both the trustees and other key parties involved with the operation of the trust. There will be a particular focus on the operational systems, processes and controls established within the master trust.
The master trust will also have to demonstrate that its business model is sustainable, that it has sufficient cash reserves to cover its operational costs, and that it has a ‘safe failure’ strategy, including reserves to cover the cost of its wind up without using members’ assets.
If these standards cannot be met then authorisation will not be granted and in cases where they are not maintained authorisation will be withdrawn. To enable our enforcement of these new standards TPR will have new powers of regular supervision and for setting reporting requirements.
I do not believe that those who already run or plan to operate a reputable, well run master trust should object to this new regulatory framework or find they are unable to meet the authorisation standards. Indeed, they should welcome the tougher regulatory regime because it is in nobody’s interests to have incompetent or criminally minded people operating in the pensions market.
I believe that what will emerge from this new regulatory regime is a master trust market capable of fulfilling its potential to be the cornerstone of a secure, sustainable and innovative DC savings and retirement market in the UK.
In fact, I anticipate that authorised master trusts will also offer sponsors of their own occupational DC schemes a credible alternative. There are many tens of thousands of DC schemes currently, far too many of which are struggling to meet adequate standards of governance and administration, and are unlikely to be able to provide value for money for their members. The consolidation of such schemes by authorised master trusts is likely to be in the best long-term interests of both their members and sponsors.
It is self-evident that employers generate economic growth through their business activities, not by running pension schemes. So is it even desirable that employers sponsor their own scheme, if they can instead outsource their employees’ pension provision to an authorised master trust or group personal pension plan?
Food for careful thought, I think, but for now, we should acknowledge this Bill as a significant step in the right direction towards our and the DWP’s goal of ensuring savers pension pots are as well looked after as they have the right to expect and deserve.
By Andrew Warwick-Thompson
Executive Director for Regulatory Policy