The Pensions Regulator has proved itself to be a flexible regulator, at least when it comes to the onerous area of master trust authorisation.
Master trusts had been given until 31 March 2019 to apply for authorisation, trigger their exit from the market or request an extension to the application period.
On April 3rd, the Pensions Regulator raised a few eyebrows by announcing that just three trusts had achieved full authorisation out of the 30 being considered, while 10 had been granted an extension with their applications expected in coming weeks, with TPR planning to update its list of authorised schemes every Tuesday. The sheer scale of the applications being
demanded of providers seeking to stay active in this fast-growing market has caused the regulator to give them every chance of getting it right.
At the time, TPR executive director of frontline regulation Nicola Parish said: “A large number of applications have now been submitted and we are expecting more applications over the next few weeks from those schemes which have been granted an extension. “We will now work to assess this large volume of applications and we are confident that we will process these applications within the timeframes laid out in law. We always expected there to be a peak in applications and have planned accordingly.”
TPR had already made it clear in October 2018, when it was setting out the application process that its decision-making process could take six months.
It has also made it clear at the time that schemes with a good reason for needing an extension could have another six weeks, though it also emphasised that a simple lack of diligence in preparing the application would not cut it.
“We will be more likely to grant an extension to the application period because of circumstances beyond the trustees’ reasonable control. Examples might include the sudden illness or incapacity of a trustee, or the resignation of a trustee or strategist. It may also be appropriate where the scheme is undertaking a major event that impacts on its structure, for example changing a key service provider or the information contained in its application,” it said.
For those looking for further explanation, TPR head of master trust authorisation and supervision Kim Brown had even blogged about extensions a few weeks earlier – though she did also warn that trustees would be challenged on the reasons.
She wrote: “The ability to apply for an extension is an essential part of authorisation, particularly in the context of a changing market.
“Some master trusts are going through significant changes which will impact how schemes are run and therefore delay their application. Extensions are also important so schemes can avoid accidentally failing over a technicality.
“When the legislation was being drawn up for the authorisation of master trust schemes, these scenarios were recognised and the opportunity to apply for an extension was written into the law.” “Any extension application must contain a good reason for us to grant the extension. It is not a foregone conclusion that an extension will be granted. You can expect us to challenge trustees on why they need more time.”
Brown also gave much more detail on the reasons for extensions – the second perhaps more surprising – that TPR wanted the best possible standard of applications – setting this in the context of the huge amount of paperwork they were receiving.
She added: “There are two main reasons why schemes apply for extensions. The first, and a common reason, is a key change to a scheme, such as a new owner, administrator or trustee.
“The second reason is because we are encouraging those filing authorisation applications in the last two weeks of March to also apply for an extension. We are keen that schemes file the best possible application for authorisation, and this ensures that schemes can send us any additional information which we may ask for after the 31 March deadline.
“To put this in some context, applications we have received so far have included up to 872 documents and checks on up to 115 people involved in the running of the scheme to make sure they are fit and proper. Rejecting an application because of a missing piece of paperwork is clearly not in the interests of a master trust or its customers – both members saving for their retirement and employers fulfilling their automatic enrolment duties.”
Talking to industry experts, it is clear the amount of detail required has caught many master trusts on the hop, but the financial requirements have proved telling too.
Claire van Rees, a partner at pensions specialist lawyer Sackers, says: “In big picture terms, the whole process of making an authorisation application has turned out to be more complicated than most of the master trusts were anticipating. You are having to document huge amounts of process to be able to present your application in the way that the regulator wants.”
She adds that one challenging aspect of authorisation has been demonstrating financial stability and within that sufficient financial reserves to meet the cost if the scheme has a triggering event and has to wind up.
“You have to show the trust could meet that cost without having to dip into member pots. For some that has not been a problem, but some have had to make sure that those financial reserves are in place.”
She adds: “A lot of master trusts have ended up being a lot closer to the wire than they thought at first. There have also been some schemes with changing circumstances. That is why we are where we are with authorisations being back-end loaded. For the regulator, everyone was telling them they would apply sooner rather than later, but it became clear rather quickly that that wasn’t going to be the case.”
PTL managing director Richard Butcher adds: “This has been a very steep learning curve for everyone involved. The master trust authorisation regime was described very quickly by the DWP and the regulator. Now the regulator and the master trusts are learning how this works as we go along.”
“It is hard going. We are all learning the process for the first time and trying to mitigate our respective risks. Of course, the principle of regulation is a good idea and arguably should have been brought in before the horse bolted.”
He believes it is having a big impact given the number of schemes that have decided to wind up. He suggests we may have a master trust population as low as 30 or 25.
“It is possible some of the current number withdraw their application and some fail to get an application through the process,” he adds.
He says that from the consumer perspective the risk is falling away for some and increasing for others. “The risk is reducing in the sense that as a trust gets authorised, members can relax, but it is peaking for those in the process who could fail to get authorisation. A strange diminishing and peaking at the same time. The process of wind-up won’t be painless, but for members and employers shouldn’t be too painful either, supervised by the regular and with legal protection for the assets.”
He says this is now freeing up the potential market of employers selecting or changing scheme and likely to have delayed a decision about their scheme until the authorisation process is out of the way.
“As the authorised population is revealed, I imagine that cork will be removed from the bottle. It may even be Willis and L&G and the others that have been authorised already will get the lion’s share.”
Atlas Master Trust head of business development Andy Dickson says: “One impact of the authorisation process has been to require employers to potentially delay making structural changes to their workplace pension scheme. The marketplace is waiting to see who comes out the other end of the authorisation process. There may be a few through, but it is not a rich enough choice yet for the market to consider.
“The authorisation process is clearly positive, but the time this is taking is creating something of a hiatus. In time that pent- up demand will come out. I am expecting things to get much busier after the summer.”
Buck head of DC and wealth Mark Pemberthy believes there will be a relatively limited impact on his client base and is not convinced early authorisation will be a big advantage.
He says: “Prior to authorisation we considered the mainstream master trust market to consist of 15-20 schemes with the scale and resources to provide quality solutions for employers and trustees requiring a demonstrable commitment to market and national coverage. We anticipate all of these schemes will receive authorisation and for our clients, we expect the market will remain largely unchanged.
“Pension scheme transitions and wind-ups are rarely done in haste and the authorisation window should have been factored in, so early authorisation is not necessarily a significant advantage. However, there may be the odd case where project deadlines mean that certainty of authorisation might be a differentiating factor if other criteria are close. However, it would be very surprising if early authorisation is a major factor in any scheme selection exercise.
LEBC head of corporate Todd Rowlands sees the prospect of a secondary market emerging, noting that around the authorisation date, nine schemes had exited and 34 had notified TPR of the intention to exit.
“These exiting will all transfer members into to an alternative trust or suitable vehicle. So the outcome will be significant consolidation with little opportunity for new trusts to enter the market.
“Subsequently I believe that we will then see a secondary market for employers, where they consider a review of the workplace pension in place and the alternatives.” He says the market may see employers move to contract-based schemes and away from master trusts, although he still expects a large master trust market to remain.
The process may also lead to some multi-employer schemes that have found themselves classified as master trusts having to move because they are no longer permitted to operate without authorisation.
Some advisers believe that the wind-up process could see more schemes ending up in Nest eventually.
CanScot Solutions partner Robert Reid says: “It’s really simple. Let’s take a master trust that has average account values of £3,000. Although this is the average account size, it’s likely to have been skewed by a few big accounts. It then doesn’t get authorisation and seeks to sell. By the time consolidation is agreed, the larger accounts will be long gone. Averages deceive – you need complete stats before an acquirer can make a move.
“ So why would anyone make such a move? Nest have government backing; the other master trusts need to remain commercially focused. I can see several being taken over with minimal price tags. It seems likely that the small accounts will end up with Nest but that means the Government is even less likely to get its money back anytime soon unless they sell it!”
Pemberthy adds: “We hope that all schemes not seeking authorisation find homes and that the transition is a positive experience for members. There are a number of market participants with the appetite, skills and experience to help these schemes with an orderly transition and we would like to see a common sense approach to capacity management and scheduling to avoid any unintended failures.”