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IPE special report May 2018

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UK pledges stricter regulation of growing master trust market

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UK master trusts will soon be subject to stricter regulation, following seemingly successful lobbying by the Pensions Regulator (TPR).

Harriett Baldwin, economic secretary to the Treasury, told the House of Commons that plans for further regulation were in the works and would be published “as soon as practically possible”.

Baldwin indicated the regulation had already been drafted, saying the government had considered attaching the new rules to the Bank of England and Financial Services Bill currently being scrutinised by MPs, but that it would have been “very late” in the parliamentary process to introduce further amendments.

She pledged that the new rules would be included in the next appropriate bill but did not provide any concrete details of the reforms.

The government’s commitment comes after months of comments from TPR on the unequal regulatory landscape facing insurance-based pension providers compared with master trusts, which include providers such as Now Pensions, the People’s Pension and schemes set up by Legal & General Investment Management and consultants Aon and Willis Towers Watson.

Lesley Titcomb, TPR’s chief executive, previously said the regulator and government were in discussions about the entry requirements for master trust operators, and hinted that a currently voluntary master trust assurance framework could become mandatory.

“We need to think very hard about how we prevent more master trusts coming into the market.” 

– Andrew Warwick-Thompson

Speaking to IPE in late January, Andrew Warwick-Thompson, executive director for regulatory policy at TPR, noted the “regulatory asymmetry” facing providers regulated by the Financial Conduct Authority (FCA) compared with the regulation of master trusts by TPR.

Asked if stricter regulation could see the master trust assurance framework become mandatory, he argued it would be a matter for the UK Parliament to decide.

He added: “There is certainly a risk we perceive, and have perceived for some time, that while automatic enrolment is hugely successful in bringing new members and new contributions into the market, some of the master trusts in the market now may not be sustainable.”

Warwick-Thompson also hinted that the growing number of master trust providers should be halted.

“We need to think very hard about how we prevent more master trusts coming into the market, and what we do with those that struggle to reach any kind of sustainable level of business in the next year or so,” he said. 

Now Pensions suggested several years ago that the government should have assessed new pension providers by licensing them.

According to TPR’s own figures, master trusts have been taking in more than three-quarters of members, nearly 4m, to be automatically enrolled.

Steve Webb, former UK pensions minister and now director of policy at Royal London, said it was “good news” the government was considering tightening the rules around master trusts.

He added: “Reports of potential conflicts of interest, poor governance and financial instability among small new master trusts are a source of grave concern.”

But others were quick to caution the government against onerous new regulation. 

Helen Ball, head of defined contribution at law firm Sackers, welcomed the government’s acknowledgement of the role played by master trusts.

“It will be interesting to see how those drafting the new legislation will strike a balance between consumer protection – which is crucial – and the practical challenges faced by master trusts of significant scale,” she added.

“In an ideal world, the final rules will protect members against weak or fraudulent trusts but avoid stifling high quality and innovative arrangements.”

Read more about the challenges associated with regulating the UK master trust market in the current issue of IPE

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