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UK regulator wins new power over master trusts in Pension Schemes Bill

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The UK Department for Work & Pensions (DWP) has published the new Pension Schemes Bill today, which it said would put important new regulations for master trusts in place and bolster existing laws on exit charges.

Richard Harrington, the minister for pensions, said: “We are helping to create a culture of saving across the country and have delivered much-needed change to our pension system to make saving easier, fairer and safer for all.”

The publication of the bill was generally welcomed by the industry, though the uncertainty over capital requirements was condemned by at least one provider.

Harrington said the government wanted to ensure savers in master trusts had the same protection as everyone else, so it was levelling-up that protection to give them more confidence in their pension schemes.

The government department said that, as things stand, there are some workplace pension-scheme members whose savings are at risk from master trusts that fall short of minimum governance standards.

The bill, in addition to strengthening pension schemes by making them meet higher operating criteria, will also boost consumer protection on a range of pension matters.

The DWP said it would create a new approval regime for master trusts and give The Pensions Regulator (TPR) new powers to intervene where schemes were at risk of failing.

Under the proposed new legislation, master trust schemes will have to show they meet five key criteria.

They will be required to demonstrate that people involved in the scheme are fit and proper, that the scheme is financially sustainable and that the scheme funder meets certain requirements to provide assurance about their financial situation.

In addition to this, the schemes will have to show they have sufficient systems and process requirements to do with their governance and administration, and that they have an adequate continuity strategy, according to the DWP.

TPR welcomed the bill, which it said would give it power for the first time to authorise and de-authorise master trusts according to strict authorisation criteria.

Andrew Warwick-Thompson, the regulator’s executive director for regulatory policy, said: “We have long called for much stricter controls on master trust schemes and voiced our concerns over the current, very low barriers to market entry.”

Joanne Segars, chief executive of the Pensions and Lifetime Savings Association (PLSA), welcomed the bill and said the industry group would now scrutinise it and discuss the planned secondary legislation with the government to make sure it was “proportionate”.

“The capital reserving and financial sustainability provisions will require particular scrutiny,” she said.

In the bill, read before the House of Lords yesterday and scheduled for general debate on 1 November, provision is made under the section on ‘Financial sustainability requirement’ for TPR to require a master trust or its funder to meet requirements “relating to its financing, such as requirements relating to assets, capital or liquidity”.

The PLSA said yesterday it had set up a master trust committee to promote and defend the model of pension provision to the government and regulators.

Industry representatives on a panel about auto-enrolment at the PLSA conference in Liverpool gave their initial reactions to the bill, details of which had been published only shortly before.

Otto Thoresen, chair of NEST Corporation, gave a cautious welcome to the bill, saying that action was long overdue but at least had now been initiated.

The bill does not appear to contain any dramatic surprises, but “the devil is in the detail”, he said, in particular with respect to how the capital requirements are defined and what will count as capital.

Emma Douglas, head of DC at Legal & General Investment Management, said some master trusts would be forced to close as a result of the measures, with the regulation being “designed to flush out” those providers that are incapable of operating to the higher standards.

She said creating “some fallout” was the regulation’s intention, and that it was key for the industry to co-operate “to provide a safety net” to avoid a “messy fallout”.

Patrick Heath-Lay, chief executive at The People’s Pension, also emphasised the importance of avoiding disorderly consolidation, even though the bill is “designed to have a market impact”.

He backed the idea of the industry’s coming together to help manage the likely fallout and suggested a panel process could help with this.

Other master trusts welcomed the draft legislation.

Morten Nilsson, chief executive at ATP subsidiary NOW: Pensions, said that, when his company had entered the auto-enrolment market in the UK, staff were shocked at how easy it was to set up a master trust.

“It was simply a case of sending a form off to HMRC and the Pensions Regulator – nothing more,” he said.

Since then, Nilsson said the firm had long campaigned for tighter regulation of master trusts to protect savers.

But he criticised the lack of a minimum capital requirement for providers entering the market, describing this as a “grave oversight.”

He said it was also disappointing that the master trust assurance framework would not be made compulsory as part of the licensing regime.

“The voluntary assurance framework,” Nilsson said, “was introduced as a quality standard to enable trustees of master trusts to demonstrate high standards of scheme governance and administration and making it compulsory and building on this existing framework seemed logical.”

Kate Smith, head of pensions at Aegon, said the bill would bring governance standards for master trusts much closer to contract-based regulatory standards, which had to be good, she said, not just for employees saving in a master trust but for the pension industry as a whole.

But some of the reportedly 100 master trusts in existence might decide the additional costs created by these standards are too great, she said.

“This may drive consolidation in the coming year, with members being transferred into stronger schemes that meet the new standards,” Smith said.

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