Master trusts to face 'strict' new market entry criteria, UK government confirms

It has included a new Pensions Bill in the Queen's Speech, which sets out the government's plans for the coming parliamentary session. The proposed bill would also give the Pensions Regulator new powers to "authorise and supervise" master trusts, as well as bring forward plans to cap early exit fees on trust-based occupational pension schemes, as announced by the government in January.

The government also intends to restructure the public financial guidance services into a pensions guidance body and a financial guidance body, which would replace the existing Pensions Advisory Service (TPAS), Pension Wise and Money Advice Service (MAS). Separately, a planned Lifetime Savings Bill would allow for the creation of the new 'lifetime ISA' (LISA) savings product announced by the government at the 2016 Budget.

Pensions and lifetime savings expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, said that background notes published by the government alongside the Queen's Speech "reinforce what we already know and understand" about the LISA.

"The real significance of LISAs will depend on whether they become part of the workplace savings package in addition to or as an alternative to auto-enrolment pension schemes," he said. "That decision will come later. There's potentially a big prize for the Treasury if LISAs do become an auto-enrolment option for employers, because it'll get the tax up front on contributions."

"Very large numbers of master trusts are already up and running and taking in contributions, so the announcement of new market entry criteria looks like a fairly belated attempt to create a barrier to entry - unless it is to apply to existing schemes too. The Pensions Regulator already has some significant powers, as does HMRC, if it does not like what it sees from master trusts. There was talk of making the master trust assurance framework mandatory – and perhaps borrowing the concept of capital reserves from the SIPP world, and FCA-regulated space generally. The former is a logical step now - the latter might be a logical next step," he said.

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 for smaller businesses which are now legally required to automatically enrol their workforce into a suitable pension scheme. Although master trusts are required to comply with the relevant pensions legislation and are expected to comply with the standards set out in the Pensions Regulator's codes of practice, they are not subject to the same requirements as the contract-based group personal pension (GPP) schemes regulated by the Financial Conduct Authority (FCA).

Currently, master trysts 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). Trusts that have done so are listed on the Pensions Regulator's website. However, there is no legal requirement that master trusts obtain this assurance and the Pensions Regulator has warned of the "risk of regulatory arbitrage" arising as a result of the different market entry requirements for master trusts and FCA-regulated GPPs.

Although no details of the new entry requirements or powers for the regulator have yet been published, the government's commitment to the new bill was welcomed by the Pensions Regulator.

"We have been calling for a significantly higher bar regarding authorisation and supervision, and we are pleased that today's announcement proposes to give us the power to implement these safeguards," said Lesley Titcomb, chief executive at the regulator.

"Currently, new master trusts are subject to far less regulatory scrutiny than new contract-based providers and so we have encouraged employers to only choose master trusts which have achieved master trust assurance, or GPPs. We continue to believe that well run, scaleable and sustainable master trusts, along with GPPs, are a good choice for employers seeking to comply with their automatic enrolment duties," she said.