New workplace pension master trust rules due 'as soon as practically possible', says government

It intends to bring in regulations "relating to master trusts and auto-enrolment" as part of "the first appropriate vehicle" to receive full parliamentary scrutiny, economic secretary to the Treasury Harriett Baldwin told a House of Commons committee during a debate on the Bank of England and Financial Services Bill. Baldwin was responding to a question from Labour MP Rob Marris, following reports in The Times about poorly regulated master trust arrangements.

According to the Pensions Regulator 3.9 million, or 76%, of members in pension schemes used for automatic enrolment were members of master trusts as of the end of last year. Master trusts enable pension scheme providers to manage a defined contribution (DC) scheme for several employers under a single trust arrangement, and are particularly attractive for 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.

Speaking last month as the regulator published its annual report on the DC pensions market, regulatory policy director Andrew Warwick-Thompson said that the growth of master trusts posed "some risk associated with regulatory arbitrage", as new master trusts were subject to less regulatory scrutiny than contract-based providers regulated by the Financial Conduct Authority (FCA).

"We are working closely with the [Department for Work and Pensions] to ensure adequate member protections are in place within master trusts," he said at the time.

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 Pensions Regulator had initially ruled out introducing a mandatory licensing regime for master trusts as disproportionate given the "small number" of master trusts it expected to emerge as a result of the automatic enrolment reforms. However, it reserved the right to "consider moving to a more rigorous framework" if take-up of the voluntary scheme was poor.

Pensions expert Mark Baker of Pinsent Masons, the law firm behind Out-Law.com, said that the authorities were "definitely right" to focus on the risks posed by poorly regulated master trusts.

"The key thing for legitimate providers is to show they fall the right side of the line," he said. "For the newer entrants to the market, this is a big area of focus."

"The Pensions Regulator seems to be moving towards using the assurance framework as a kind of informal benchmark, so even if the DWP does not end up legislating, the number of newer entrants obtaining assurance is bound to increase. But the challenge is for smaller employers who won't be aware of the regulator's criteria. The publicity over the last couple of days might help here. It seems certain the DWP will legislate, and we just have to wait and see whether they make the assurance framework mandatory or take some other approach," he said.