New laws come into force today (October 1) which require all master trusts to be regulated by The Pensions Regulator.
Existing master trusts have a six month window to file their authorisation applications.
To be authorised trusts will have to prove they are financially sustainable, have business continuity plans in place, and be run by people meeting the regulator’s ‘fit and proper’ test. This includes having sufficient reserves to cover potential wind-ups.
Only authorised master trusts will be allowed to continue to operate and be listed on the Pension Regulator’s website.
Aegon’s head of pensions Kate Smith says: “Already 30 master trusts have decided not to apply for authorisation and have exited or are exiting the market. More will follow as stronger regulation and ongoing supervision bites, potentially cutting the number of schemes in half in a year or so.”
These laws are designed to drive up standards in the occupational pension sector, and provide greater protection for members.
It also ensures there is more of an even playing field between master trusts and group personal pensions, which have always had to meet stricter regulatory tests.
TPR executive director for frontline regulation Nicola Parish says: “We pushed for extra protections around this market and are pleased that the law has come into force today.
“The success of automatic enrolment has led to rapid growth in master trusts. Authorisation and supervision is vital to ensure 10 million savers can have confidence that their retirement savings are safe.”
There has been a proliferation in the number of master trusts set up, following the introduction of AE in 2012. However, low regulatory barriers at the time meant that master trusts could be set up by almost anyone, giving little protection for members.
Given the numbers set up, there were also doubts that many of these master trusts would not achieve critical mass. This prompted fears that if a trust collapsed, and the scheme’s funder had insufficient funds to cover wind-up costs, these could be taken from members’ funds.
There were concerns from regulators, the industry and government that this would dent confidence in the UK’s pension system, and damage the AE programme.
Hymans Robertson senior consultant Sharon Bellingham adds: “The message from TPR to applicants has been loud and clear – don’t be the first to fail and take time to get the submission spot on.”
She adds: “Looking ahead it doesn’t take much crystal ball gazing to see that the consolidation already happening will gain pace. It’s absolutely key to ensure that individuals are protected at all times and it’s also important to avoid chaotic market exits which may dilute confidence in the master trust brand.
“What we’ve seen so far has been controlled and measured, which is exactly how it should be.”
She adds: With few exceptions, the market is pretty vanilla right now so there still is opportunity for new entrants – disruptors and pioneers with a well thought out road map, an understanding of exactly who their customer is and a clear focus on how best to meet their needs.”