Master trusts to face capital adequacy rules
The government is looking to impose capital adequacy requirements on master trusts through the forthcoming pensions bill, PP understands.
Auto-enrolment (AE) master trust providers will need to ensure they have enough money to cover the costs of transferring to other schemes or winding up without charging members, if the scheme is forced to close.
At a meeting on 15 July the Department for Work and Pensions (DWP) reportedly also disclosed that master trusts will need to comply with "fit and proper" governance standards. This means trustees of master trusts will likely have to meet certain qualification standards.
PP understands DWP will introduce the new requirements into the upcoming pensions bill.
The DWP declined to comment, stating the details will revealed when the bill is introduced to parliament.
Smart Pensions chief operating officer Peter Walker, who attended the meeting with DWP, told PP the proposals lacked much detail at present.
He said: "It is likely capital adequacy will be included in the bill, but there are no clear methodologies, calculations or detail attached to that. There's been a discussion about that as a broad area. There are various models they might follow which are already in existence.
"What they're keen to avoid is the amounts involved and the calculations. In the meantime, it's going to take a while for the legislation to take form."
A spokeswoman for NOW Pensions also confirmed the discussions had taken place, and welcomed the potential changes.
She said: "We've wanted tighter regulation of master trusts for a long time. When we entered the market, we were surprised how easy it was to set one up. There is no need for a license to operate, or capital adequacy. You just have to send a form to HMRC.
"We are also a supporter of the ‘fit and proper persons' test, but we want that to be on the whole trustee body, rather than the individuals."
The standards will be overseen by the Pensions Regulator and will be similar to those set for businesses already regulated by the Financial Conduct Authority.
The rules would bring master trusts in line with group personal pensions, which are already required to protect members in the worst case scenario. It also means it is unlikely a lifeboat fund, similar to the Pension Protection Fund (PPF), will be established for master trusts.
Walker added: "There was some discussion about whether an insurance-based approach for defined contribution schemes would be a runner. But the DWP have come to a view it would be too slow to be designed and implemented.
"Another issue is it might lead to perverse incentives - if I'm insured, I might take more risks. That would lead to people who play by the rules paying for the mistakes of those who do not."
The attendees also said a move to make the Master Trust Assurance Framework (MAF) mandatory was unlikely. This is despite a large number of master trusts striving to achieve the accreditation.
It is not yet known when the bill will enter the House of Commons, with the DWP blaming recent political turbulence for the uncertainty.
Today is the last day of parliament before the summer recess, so the bill will not be introduced until the autumn at the earliest.
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