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The race is now very much on to encourage as many people as possible to save for their retirement through workplace pensions and auto-enrolment – and boosting the regulatory regime around master trusts is an important part of the work being done.
As more people start to contribute, trust and security will be critical to auto-enrolment success. So here – always assuming Brexit allows Parliament time to consider anything else – is what the Autumn Pensions Bill could look like.
To start with, it looks as though there will be a mandatory minimum capital adequacy requirement for new master trusts, based on the size of assets under management. This means the master trust would have to hold enough cash in the bank to cover costs in the worst-case scenario without charging members. This would need to cover costs of transferring to another scheme or of winding up, in a structure that gives trustees control of the funds should the scheme sponsor fail.
Second, we expect The Pension Regulator’s Master Trust Assurance Framework (MAF) to be one of the new mandatory stipulations for all new master trusts in the new Bill. The MAF is regarded as the gold standard for the operation of master trusts.
Achieving MAF status involves a detailed annual independent review to ensure the master trust is administered and governed according to strict regulatory standards. At the moment, this is voluntary and only 10 of the 79 registered master trusts are listed as MAF-compliant on the Pension Regulator’s website. It is, however, unlikely this will be made compulsory for all retrospectively.
Third, we are expecting there to be a Pension Protection Fund-style insurance policy for master trusts to make sure there is money in the pot for all eventualities, including member compensation. This is likely to be applied to all new trusts as well as being phased in for existing schemes.
And, finally, there is likely to be a mandatory requirement for a ‘fit and proper persons’ test. This would not just apply to those setting up the master trust – in other words, not only would there be a requirement for relevant and extensive financial experience and competence for founders, but also a requirement for the master trust to appoint competent, independent trustees.
The Bill is expected in the autumn. It has sprung from a concern that master trusts have been both too easy to set up and under regulated. If these simple stipulations are built into statutes, it will make setting up and running a master trust more demanding and expensive than has hitherto been the case but will also greatly reduce risk to members and improve their confidence in pensions
It is our view that this is essential to ensure the success of auto-enrolment with the ultimate goal of ensuring all British-based employees receive the opportunity to save for their retirement with contributions from their employer and the Government.
In the long run, the reality is there is likely to be a consolidation, with the top-tier master trusts swallowing up smaller entrants into the market that do not reach the necessary scale. Smart Pension has, for example, already taken over management of GenLife’s Master Trust and so protected the interests of Gen Life members. Good governance will be critical for those trusts that may in the future look to consolidate.
Peter Walker is chief operating officer of Smart Pension. He is also a former board member of the Pension Protection Fund and has held CFO and COO roles at Coutts Bank and Kleinwort Benson
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