How master trust authorisation protects pension confidence

As the master trust market has grown, so has the need for members and employers to feel confident in their choice of pension provider. That is a key focus for The Pensions Regulator.

The number of members saving into master trusts has swollen from 270,000 in 2010 to nearly 16 million today, as a result of auto-enrolment. Despite that explosive growth, these schemes were operating under a regulatory framework created with single-employer schemes in mind. This was inadequate for master trusts, which are often commercial arrangements.

There were specific areas of risk, such as profit motives, the huge volume of savers involved, and the impact on confidence in pension savings should a scheme fail. It became clear that we needed authorisation and ongoing supervision to protect saver confidence and reduce risks from failure and fraud.

New safeguards, introduced on 1 October 2018, meant all existing schemes had to meet demanding new standards - or close. The market consolidated by nearly 60%, from 90 schemes to 37, reflecting the high bar for authorisation and our open discussions with schemes to clearly set out expectations. Some schemes chose not to apply or realised they would not be able to meet these standards and wound up with members transferred safely into authorised schemes.

Other schemes either made improvements to their governance processes and business plans in advance of applying, or as a result of the authorisation process. These improvements saw significantly more money put into financial reserves, changes in the people running some master trusts and documented evidence showing systems and processes were adequate.

Every authorised master trust has proven, and must continue to prove, it and its trustees meet the standards laid out in the legislation and code of practice. They must be run by fit and proper people and have the right systems, processes, plans and finances in place. They are subject to our risk-based supervision regime that ensures they continue to meet standards.

How often we interact with authorised master trusts depends on a range of factors, including a scheme’s scale and complexity and any particular risks. Schemes that present a higher risk are supervised more intensely. New schemes will also be more intensely supervised than existing ones as they lack an operational track record.

This market is likely to continue to grow in terms of members and assets, and authorisation will ensure that savers are better protected. There is still a huge oversupply of defined contribution occupational schemes, some of which struggle to meet adequate standards of governance and pose a risk to good member outcomes. In future, we may see more consolidation into master trusts.

Our powers ensure financially weak or poorly governed master trusts cannot open for business in the first place. Those that already exist have met – and must continue to meet – tough governance standards.

By reducing the risk of high-profile failure or fraud in the master trust sector, authorisation is protecting confidence in pension saving in the UK, as well as the good reputation of auto enrolment. Ultimately, it’s good news for all members saving into a master trust.

The author is Nick Gannon, policy specialist at The Pensions Regulator.

This article is The Pensions Regulator.

Nick Gannon's article features in the REBA Pensions and Master Trusts report, in association with Scottish Widows. The report explores employers’ views on their pension schemes; the challenges they face with encouraging staff to save for retirement; and what actions they plan to take to address those challenges in the future. It also explores employers’ views on master trust pensions and their position within the pensions market. Download the full report for free here.