Master trust ‘assurance reporting' only part of the picture, says expert, as trustees get to grips with DC

However Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, said that the final ‘assurance framework’ produced by the Institute for Chartered Accountants in England and Wales (ICAEW) for the regulator was only “part of” the compliance picture for trustees. Defined contribution (DC) delivery and governance failures could ultimately result in claims, complaints and regulatory intervention against trustees, he said.

“As the name suggests, master trusts are run by trustees. Trustees have legal duties to discharge which have been established over many years. These duties hark back to defined benefit (DB) schemes - so trustees need help now to apply the duties to the very different context of DC schemes,” he said.

The framework is designed to support trustees of master trusts and those that they engage to provide assurance reports, which will remain voluntary but “expected”, according to the regulator’s head of DC, Andrew Warwick-Thompson. Trustees who choose to obtain independent assurance of their scheme’s quality will be expected to submit their first reports by summer 2015.

Master trusts enable pension scheme providers to manage a DC scheme for several employers under a single trust arrangement. They are particularly popular for businesses which are now legally required to automatically enrol their workforce into a suitable pension scheme, but may not necessarily have the resources and skills to run a dedicated pension scheme.

The new assurance framework focuses on six broad areas based on the Pensions Regulator’s existing principles for DC schemes (36-page / 538KB PDF). These include the essential characteristics of schemes; the need to establish a comprehensive governance framework with clear accountabilities at the start; appropriate scheme administration; and good communication with scheme members, designed to ensure that they are able to make informed decisions about their retirement savings.

Schemes should be designed to be durable, fair and deliver good outcomes for members, while all those accountable for scheme decisions must understand their duties and be “fit and proper” to carry them out, according to the framework. These characteristics and principles should be backed by effective governance and ongoing monitoring throughout the life of the scheme.

Although voluntary, trustees would be expected to report on the operating arrangements of the master trust on a regular basis, and support their findings with an independent assurance report covering the description and design of the scheme and its compliance with the framework. The Pensions Regulator has announced its intention to establish and maintain a publicly-available list of schemes that have obtained this independent assurance, with the intention that employers refer to it when selecting a master trust to meet their automatic enrolment requirements.

“It is important that schemes operating in this market place [for master trusts] are scalable, durable, well-governed and embrace high standards of practice,” said Warwick-Thompson.

“Assurance acts as a check against schemes being set up by people who lack the competence or financial resources to take care of people’s pension savings adequately. Whilst voluntary, we expect master trusts to obtain this independent assurance and we strongly support those providers who have already informed us of their intention to adopt this important accreditation,” he said.

Although the Pensions Regulator said that a small number of respondents to its consultation on the draft framework urged it to go further and introduce a mandatory licensing regime for master trusts, it has ruled out doing so for the moment. Although licensing regime could be effective in managing new market entrants, the regulator said that the costs it would impose on schemes would be disproportionate at this stage.

"In a deregulatory environment and period of austerity measures, we consider that voluntary assurance is a proportionate response in the context of the regulator's overall risk-based approach to regulating DC schemes," it said, according to Money Marketing.

"The regulator expects that there will be a small number of master trusts and believes that its existing powers and voluntary assurance form a solid basis for regulating this sector. We will monitor how the market responds to the introduction of voluntary assurance and will consider moving to a more rigorous framework if take-up is poor," it said.