Industry rejoices as a new Pensions Bill is announced that will give TPR greater powers to regulate mastertrusts

Listening to the Queen’s speech you could easily think that the government had decided against introducing a Pensions Bill in 2016, but tucked away in its background notes was the confirmation that we will face yet another year of legislative change.

Houses of Parliament

And while pensions professionals regularly make impassioned pleas for a period of regulatory peace and quiet, many have welcomed the measures to tackle the ongoing issue of mastertrust governance and regulation promised for this latest piece of legislation.

One of the core problems facing the mastertrust market is that the barriers to entry are so low, meaning it’s incredibly easy for someone to set one up. This has led to a proliferation of these schemes, raising concerns that many of them are not fit for purpose and cannot stand the test of time.

The bill, however, will look to change all that by forcing mastertrusts to demonstrate that schemes meet strict new criteria before entering the market and taking money from employers or members.

New mastertrusts are subject to far less regulatory scrutiny than new contract-based providers

Lesley Titcomb, chief executive of the Pensions Regulator said: “Currently, new mastertrusts are subject to far less regulatory scrutiny than new contract-based providers and so we have encouraged employers to only choose mastertrusts which have achieved mastertrust assurance, or group personal pension plans (GPPs).”

“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.”

What this won’t necessarily do, however, is help govern existing mastertrusts, more than 100 of which have already been set up. Pensions expert at law firm, Pinsent Masons, Tom Barton commented: “There are already very large numbers of mastertrusts up and running and taking in contributions. This looks like a fairly belated attempt to create a barrier to entry – unless it is to apply to existing schemes too.”

Fortunately, new powers afforded to the Pensions Regulator may help to solve the governance challenges of the mastertrusts that are already up and running.

Currently, the Pensions Regulator has little power over mastertrusts, with only a voluntary assurance framework to help govern standards. However, the Pensions Bill will create greater powers for the Pensions Regulator to authorise and supervise these schemes, including the power to “take action when necessary”.

There has been a gaping hole in TPR’s powers to regulate this market

Darren Philp, director of policy and market engagement at the People’s Pension welcomed the proposed legislation. He said: “There has been a gaping hole in the Pensions Regulator’s powers to regulate this market effectively. The regulator’s voluntary approach just cannot cut the mustard when it comes to protecting the savings of millions of people.

“That’s why we welcome the announcement that the Government will bring forward a Pensions Bill to ensure schemes are well run, meet quality standards and are sustainable. This is an important piece of the jigsaw in ensuring people are saving in good quality schemes and are not opened up to scams. Appropriate and proportionate regulation is crucial in securing the pension savings of millions of people. It’s taken a while to get there, but we are pleased the Government has listened and is now tackling the issue.”

Appropriate and proportionate regulation is crucial in securing the pension savings of millions

It’s not yet clear what form those new powers may take. One suggestion is that the current voluntary framework could be made mandatory. Barton said: “The regulator already has some significant powers, as does HMRC, if it does not like what it sees from mastertrusts. There was talk of making the mastertrust 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.”

However, Philp argued that mandatory assurance alone will not be enough to ensure sufficient governance standards for mastertrusts. He said: ”Making the MAF mandatory wouldn’t be enough. TPR needs to ensure schemes meet minimum quality criteria to operate in the market that go over and above what’s required in the MAF and are sustainable over the long term. ”

Morten Nilsson, CEO of NOW:Pensions has outlined the five areas master trust regulation needs to address:

  1. Minimum market entry criteria including stringent tests to assess quality, governance and robustness of the business plan
  2. Qualified trustee body who are responsible for the oversight of the product to ensure that the best interests of the members are met
  3. A duty to maintain an up to date plan for the orderly wind of their scheme and release of members’ funds to alternative pension vehicles
  4. Wind up plans to show where the finance will come from to pay for all the administrative costs of dispersing the trusts’ assets to new homes.
  5. A regulatory regime which is able to proactively spot inadequate behaviours and governance with teeth to enforce best practice