Authorised master trusts look ahead to supervision

Thirty-seven schemes were given the Pensions Regulator’s blessing to continue providing multi-employer defined contribution services under authorisation, which came to a close in November.

However, senior figures at several master trusts tell Pensions Expert that this process is just the start of a more interactive relationship with the watchdog. Those who are up for this challenge are now looking to streamline processes for consolidating those leaving the market, while price competition is heating up.

First and foremost, some master trusts will be among those schemes allocated dedicated supervisors for one-to-one supervision, establishing a permanent channel of interaction with the regulator for the first time.

There is a possibility this could feel like an annual mini-authorisation review as the master trusts have to continue to meet the criteria

Helen Ball, Sackers

The intensity of supervision will depend on TPR’s assessment of a range of factors, including the scale and complexity of the scheme, current and past issues uncovered during authorisation, and the provider’s willingness to co-operate with the watchdog.

Helen Ball, head of DC at law firm Sackers, says: “The regulator is increasing its points of interaction with master trusts.”

Every authorised scheme will receive a letter confirming the name of its supervisor and points of interest. “These points will be based on the application each scheme made. Each master trust will have different areas of interest to the regulator, and some could have more areas to address than others,” she says.

Much is still unknown about how this relationship will develop, with the level of resource and scrutiny dedicated to the sector still unclear.

However, master trusts will have to submit a special, detailed annual return. Ms Ball says: “There is a possibility this could feel like an annual mini-authorisation review as the master trusts have to continue to meet the criteria.”

There is a question about how closely the supervisory team of the regulator will dig into this information. “Will it just be filed or will it be closely examined and discussed with the master trust?” says Ms Ball.

Trusts look for positive relationship with TPR

Despite this uncertainty, significant changes are not expected over the short term, and Jessica Rigby, director of strategy at Evolve Pensions, looks forward to building a positive relationship with TPR.

“For the next few years, the regulator is likely to take a collaborative approach to understand master trusts better,” she says.

One area the watchdog might want to figure out over the next few years are the systems and processes of a master trust.

Ms Rigby says: “During authorisation, the regulator relied on an external auditor to verify rather than checking themselves.” The regulator might now take a more hands-on approach, she adds.

Financial sustainability will be an area of continued focus. Ms Rigby says: “The regulator will want to understand the business plans in a changing environment.” 

It will want trustees to keep financial sustainability central to decision making and how this is factored into growth and client opportunities, she adds.

Market set to shrink further

Consolidation will become an important trend over the longer term. With price competition beginning to hot up as providers vie for business in the aftermath of authorisation, further exits and partnerships are expected to ensue.

TPR is likely to play an important role, wanting to be involved in any new deals as well as possibly encouraging this as a mechanism to encourage better value for money.

Past experience of the UK’s DC market shows a shrinking of the space is likely over the longer term. David Lunt, head of business development at The People’s Pension, says: “In the 1990s, there were around 20 to 30 group pension providers. Now there are around seven.”

Consolidation will help master trusts to offer their members better value for money.

Zoe Alexander, director of strategy and corporate affairs at Nest, says: “Very large, well-governed schemes have the potential to incrementally build value for money for their members over time.”

Scale gives a master trust the resource to pursue a well-thought-through investment strategy, and as the assets grow this heft can be used to drive down charges, she adds.

The regulator can help by taking a closer look at how value for money can be driven by the consolidation of the market, and how it can help to promote great cost-effectiveness and communicating this to the members, Ms Alexander says.

Larger master trusts are getting ready to play an active role in consolidation. Mr Lunt says: “We have put in place a solid protocol to follow when discussing merging with another master trust.”

Co-operation vital to consolidation

There are a number of moving parts that need to be addressed to ensure combining two master trusts happens smoothly. 

Mr Lunt says: “It’s vital to work in collaboration with the trustees of the scheme that is winding up, as well as advisers and third-party administrators.”

It is important to have a clear project plan including milestone dates and a project lead, he adds.

Acquiring a master trust needs to be approached in two stages. “First, you move the active members to the new scheme, and once this is completed the assets can be consolidated,” Mr Lunt says.

Consolidating assets can take time as trustees will first need to verify their member data is correct to communicate the changes and to test that data with the receiving scheme.

Mr Lunt adds: “It’s better to take the time needed to make sure sensible milestones are set with the necessary due diligence.

“The transition of assets needs to be carefully planned to ensure the assets are transferred smoothly between the investment managers to minimise market risk.”

This also allows timely statements to go out to members to confirm the completion of the move.