Running a master trust set to get tougher as new regulatory regime confirmed

Some projections show assets in master trusts rising to £300 billion over the next 10 years, which is why it's vital to get this regime right.

As we approach authorisation, providers and trustees will be under great pressure to demonstrate a high calibre, durable products. It may be that not all master trusts get through the process.

Issues for providers and trustees

With draft regulations now published for consultation, providers and trustees will need to plot their route to authorisation at the earliest opportunity. This is a big undertaking, and stakeholders cannot afford to get it wrong. Although some of the detail will not follow until later, it's certainly possible to build timelines and project plans now - which work out, for example, how the authorisation process will interact with the master trust assurance framework (MAF) process during 2018.

The cost of operating a master trust will increase under the new regime, and not just because of the widely-reported authorisation fees. An annual levy of 30p per member for Fraud Compensation Scheme purposes, compliance costs associated with the prospect of a tougher version of the MAF requirements and inevitably higher advisory costs will all have to be factored in.

Insurers, employee benefit consultants (EBCs) and other regulated firms and individuals will not be unduly concerned by the cost and compliance measures, given their background with the Financial Conduct Authority (FCA) and, for larger insurers, the Prudential Regulation Authority (PRA). For some other firms it will be harder work.

The Department for Work and Pensions (DWP) has had a difficult job, preparing regulations that apply equally across a range of very different master trusts. The result is a regime which applies most easily to commercial auto-enrolment master trusts, which deal only with defined contribution (DC) pensions. When you apply some of the small print to non-auto enrolment business or, say, mixed defined benefit (DB) and DC master trusts then it gets more difficult.

There is only a short period of time to identify the details in the new regulatory regime that won't work when applied to an 'atypical' master trust structure – so providers really need to be scrutinising the small print now.

Issues for employers

Any employer signing up to a master trust will have to ask the right questions. Will the trust get authorised? When are they planning to obtain authorisation? And what discussions have the provider and trustees already had with the Pensions Regulator?

Employers may also have to grapple with the government's proposed law change to make bulk transfers of DC pension accounts easier. Transferring DC pension accounts takes seriously careful project management at the best of times, but an employer looking to make one of these transfers during 2018 will need to plan around the change to the law on bulk transfers, and around making sure their chosen master trust will be authorised.

Providers tend to be closely tuned into the challenges around transfers, and might be able to provide some support to employers. Meanwhile, employers planning a transfer during 2018 should be sitting down now to scope out the steps needed and the timing.

The government's consultation on the draft regulations closes on 12 January 2018.

Tom Barton and Mark Baker are pensions experts at Pinsent Masons, the law firm behind Out-Law.com.