A key challenge for The Pensions Regulator (TPR) is to regulate Master Trusts in a way that adequately and appropriately guards against failings that could undermine confidence in the Master Trust market, while avoiding stifling competition and innovation. Perhaps predictably, with what is still a young regime, there is also still uncertainty and ambiguity around some of the regulatory requirements of supervision and TPR expectations . This ambiguity could be greatly reduced provided TPR is proactive over the coming years in providing clear guidance, both on minimum compliance and best practice, which allow the Master Trust market to develop and innovate in a way that benefits members.
Investment is an important area where TPR will need to develop its thinking and guidance for Master Trusts. A lot of the focus during Master Trust authorisation was on general governance, systems and processes, and financial reserves. Little scrutiny was given to investment governance, and this will need to be a greater focus as part of TPR’s ongoing supervision regime, including developing thinking on how Master Trust trustees should carry out their value for member assessments.
There has been a tendency for legislative disclosure requirements for occupational pension schemes to be unduly prescriptive. Previous essays in this series identified room for technology to revolutionise member engagement with pensions. However, it’s important that this doesn’t get bogged down in technical compliance with prescriptive disclosures or requirements around engaging with members through electronic means. A review and simplification of the legislative regime in this area is needed to support better engagement with members in the future.
Technology in default tailoring
Technology was also identified in a previous essay as a means to allow better tailoring of default funds for Master Trust members. In order for this kind of innovation to succeed, trustees will need to feel confident that using technology in this way does not expose them to greater risks of claims from members that tailoring was inappropriate. TPR has a role to play here through engagement and guidance in helping trustees understand the processes they should go through and challenges they should make in satisfying themselves that novel uses of technology in this area are appropriate.
More regulation of decumulation is also needed
from the Department for Work and Pensions (DWP), while ensuring this is not done in a way which stifles innovation. At the moment there is very little governing how Master Trusts - or Defined Contribution (DC) schemes in general - should go about offering decumulation options or helping members make appropriate choices. DC decumulation should be a regulatory priority given the risks to members of poor decisions as part of decumulation.
As part of consolidation over the next five to ten years we will also see employers evaluating the Master Trust they have chosen and considering whether to move providers. Regulation around DC bulk transfers has been simplified in recent years but some technical difficulties on the tax side remain. These make moving to a Master Trust in the first place more complex than it needs to be. Tidying up areas of legislation like this would be beneficial.
Dynamic between providers and trustees
From a governance perspective, one of the challenges in provider-led commercial Master Trusts is the dynamic between the provider and trustees. While the authorisation process recognised the tensions that can arise from this and sought to ensure that measures were in place to address this, further work can be done by TPR to encourage providers and trustees to manage this relationship productively and in the interests of members.
Initial legislation to enable Collective Defined Contribution (CDC) schemes will not initially extend to enabling CDC to be provided through Master Trusts. Unless the legislation is extended to cover Master Trusts, it is likely to become a niche option that is only realistic for large employers. It is important that further legislation is introduced extending CDC to Master Trusts sooner rather than later.
We’ve identified some areas where more regulation is needed to protect members interests, and some areas where regulation needs revision to avoid acting as an unnecessary barrier to good Master Trust development. TPR will also need to develop its expertise and focus in certain areas to address evolving risks, ensure clarity of expectations, and support Master Trusts in achieving best practice.
This article was featured in Pensions Aspects magazine March 2021 edition.
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