High quality master trusts a 'top priority' for Pensions Regulator

Addressing the "quality and viability" of these trusts is among the regulator's top 10 priorities, according to a new 'corporate plan' setting out its programme of work over the next three years. As part of this work, the plan makes it clear that the regulator will promote those schemes run by providers authorised by the Financial Conduct Authority (FCA) as well as those that have obtained independent assurance via the voluntary master trust assurance framework.

Master trusts enable pension scheme providers to manage a defined contribution (DC) scheme for several employers under a single trust arrangement, making them particularly attractive to smaller businesses which are now legally required to automatically enrol their workforce into a suitable pension scheme but which do not necessarily have the resources to run a scheme of their own. However, these arrangements can be subject to less regulatory scrutiny than FCA-regulated contract-based schemes, prompting the government to pledge earlier this year that it would introduce new rules as part of "the first appropriate vehicle" that will receive full parliamentary scrutiny.

"The Pensions Regulator has very forcefully highlighted this issue, understandably," said pensions law expert Mark Baker of Pinsent Masons, the law firm behind Out-Law.com.

"The concern is about trusts that have been set up off the radar and that might not be sustainable. The regulator is pledging action to address those risks – but the big uncertainty is about the work the Department for Work and Pensions is doing on the costs of winding up. Will the DWP force providers to commit to paying these costs? We have to wait and see," he said.

"The regulator says it will engage directly with master trusts where it has a concern, but the truth is that it is doing this already. This behind the scenes work is a key part of the regulatory effort, and it's good that it has been recognised," he said.

Currently, master trusts can obtain independent assurance of their quality, measured against a voluntary assurance framework developed by the Institute of Chartered Accountants of England and Wales (ICAEW). However, there is no legal requirement that master trusts obtain this assurance. Independent assurance allows master trusts to quickly demonstrate their compliance with the regulator's mandatory governance standards for all DC schemes.

The regulator said that it planned to work with ICAEW on a revised version of the assurance framework as part of the corporate plan, as well as with the FCA and government to "identify and address unmitigated risks to members of master trusts". According to the corporate plan, the regulator's biggest concerns are that if large master trusts fail members could be "forced to meet the administration costs as a result of [their] disorderly exit from the market" without a sponsoring employer, while smaller schemes may not have enough members or assets to deliver sufficient investment returns.

Other priorities listed by the regulator in its corporate plan include finalising the successful implementation of automatic enrolment with small and micro employers, effectively regulating defined benefit (DB) and public service pension schemes and increasing members' engagement with pensions, by improving their understanding and working with the FCA on the creation of a single 'pensions dashboard' where savers would be able to see all of their different long-term savings products in one place. It also intends to "maintain confidence" in the pensions system by protecting assets from the impact of pension scams and disrupting scam activity.

The plan also sets out where the Pensions Regulator intends to reduce its planned spending in line with its stated commitment of reducing the levy on pension schemes by 17% against the 2015/16 level by 2019/20. In particular, it has identified a "significant reduction" on planned spending on automatic enrolment compared to its previous estimates for between 2016/17 and 2020/21.

Pensions expert Stephen Scholefield at Pinsent Masons, the law firm behind Out-Law.com, said that the spending reduction would make sense once more firms had completed auto-enrolment. However, he added that it would be "interesting to see how the reassuring words translate to performance on the front line".

"One omission from the report seems to be in helping trustees to combat pension scams," he said. "Educating trustees and the public is all well and good, but what trustees really need is practical guidance as to how the regulator expects them to act when education isn't enough."