Master trust regulations: a welcome step to protect pension savers

Master trust authorisation is essential for the development of a safe and sustainable market of defined contribution (DC) schemes, and we’ve been pushing for it for some time.

The success of automatic enrolment has led to a significant growth in the master trust market – there are now 7.1 million savers using such schemes, an increase of 2,000% since 2010.

But there are currently very low barriers to entry to the master trust market and no regulation of schemes. The Pensions Schemes Act addresses this through new powers for us to authorise and de-authorise master trusts.

So it’s with a great deal of satisfaction that we’re seeing the draft regulations on the master trust authorisation process from the Department for Work and Pensions (DWP) out for consultation this week.

The new authorisation process will include a template application form for schemes to use, and a list of evidence that we’ll expect to support the application.

Master trusts will have six months from the start of the authorisation regime to submit their application. To be successful, they’ll have to meet criteria set in five test areas, and we’re recommending that schemes focus on these over the next few months while we wait for the regulations to be consulted on and finalised.

The first area is fit and proper. Our assessment on this will be on key individuals involved in running the master trusts – aligned as closely as possible to the Financial Conduct Authority’s (FCA) assessment.

Secondly, we’ll focus on the scheme funder. This is the person (or company) responsible for financing the scheme where the administration charges aren’t enough to cover the costs of running the scheme. The scheme funder must be able to demonstrate that they’re able to support the master trust.

Next, we’ll look at systems and processes. Here, we’re expecting detailed requirements relating to IT systems, business proposals and controls used in scheme administration to be set out in the regulations. Our forthcoming code of practice will clarify how the requirements should be met, along with some indication of how schemes should show us that they’re meeting them.

Financial sustainability is another test area. The new regulations and our code will set out what should be included to calculate these costs, the assets required to meet them, and liquidity requirements for schemes to be able to meet costs as they fall due.

The fifth and final test area is the continuity strategy. This is a document prepared by the scheme that outlines how members will be protected if a triggering event happens. A key part of this strategy will be how it links to financial stability so we can be satisfied that a scheme can afford to carry out its plans.

Sub-standard schemes present an unacceptable risk to members and we hope that the introduction and implementation of the new authorisation regime will create a secure and scalable segment of the DC savings market, which will provide good value for members and serve as a destination for unsustainable small schemes.

Schemes will have to apply for authorisation and if they don’t meet the standards required they will have to wind up and exit the market.

DWP’s consultation gives you a great opportunity to have your say, including on things like the authorisation fees, so I do recommend that you engage and respond to the consultation.

Nicola Parish
By Nicola Parish
Executive Director of Frontline Regulation