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Authorisation regime slashes size of UK master trust market

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The number of master trusts in the UK has more than halved following the introduction of authorisation requirements, the country’s pensions regulator announced yesterday.

Under a new law brought in 2017, master trusts in the UK have to meet new standards or close, with The Pensions Regulator (TPR) opening an authorisation process for existing entities in October last year. The main deadline to apply for authorisation was 31 March 2019, although schemes could request a six-week extension.

Yesterday the regulator announced that the final schemes had been authorised – Salvus Master Trust and FCA Pension Plan – and that the market had shrunk from 90 master trusts from before the authorisation process to 37; 38 schemes applied for authorisation but SuperTrust UK this week announced it was withdrawing from the market.

One new master trust has submitted an application for approval, which TPR is currently assessing.

The regulator’s starting figure of 90 includes several schemes that decided to leave the market after it ran a pre-authorisation voluntary application process, as well as schemes that legal advice ultimately showed did not meet the definition of a master trust in legislation: a trust-based occupational defined contribution (DC) scheme that is used by two or more unconnected employers.

TPR said 11 schemes have exited the master trust market so far, and a further 36 have notified it of “a triggering event to exit the market” and will transfer their members to an alternative master trust scheme or other appropriate vehicle.

The 37 authorised schemes have more than £36bn (€41bn) in assets under management between them, 16 million memberships, and total financial reserves of £524m.

Master trust application and authorisation figures

TPR master trust authorisation process chart

Source: TPR. Figures correct as at 5 November 2019

Nicola Parish, executive director of frontline regulation at TPR, said the number of schemes leaving the market “shows that these laws are demanding – and rightly so.

“The 37 authorised master trust schemes will continue to be closely supervised by us to make sure they continue to operate within the law.”

Due diligence ramps up

The regulator said authorisation had resulted in many improvements to the schemes, including “a major shift” in the level of financial due diligence applied by DC trustees. In a number of instances, trustees took covenant advice on the corporate entities sitting behind master trusts, it noted.

TPR also said its engagement with schemes during the authorisation process led to the total amount of financial reserves held by the schemes increasing by £93m. The reserves cover the costs of winding up a scheme and protecting members’ pension pots.

“Because of authorisation, the quality of master trust products and providers has improved; therefore increasing protection for members,” said TPR.

“The authorisation of master trusts offers a route for consolidating DC schemes, and the reduction in the size of the market by 53 schemes is evidence of the high bar for authorisation.”

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