In the latest Informed Comment, advisory firm CCW's Andrew Penketh makes the case for the mastertrust assurance framework, as opposed to a mandatory regime whose costs would be passed on to members.
It is important that those pension savings are invested in value-for-money schemes that are well governed. Protecting savers is particularly important as auto-enrolment moves to smaller firms.
Providers have of course recognised a commercial opportunity and a new breed of mastertrusts have been established in competition with Nest and each other.
A mandatory regime could impose higher costs on mastertrusts
To address the value concerns, the government is introducing a charge cap of 0.75 per cent for the default funds of all qualifying schemes and is also taking action against charging practices ill-suited to auto-enrolment.
So, why have some people been calling for additional regulation of mastertrusts?
As the name indicates, mastertrusts are already subject to trust law and to an extensive regulatory environment which many have argued is already too complex.
The main concern lies in the fact there are few barriers to setting up a mastertrust, coupled with the point that providers need to be in it for the long term.
This is a low-margin business in an already heavy regulatory environment. It is important that new entrants do not enter the market to make a quick buck with the temptations this would bring, potentially leading to lower standards of administration, governance and member communications.
The Pensions Regulator has considered a wide range of regulatory options, from treating mastertrusts no differently from other trust-based schemes, through to stronger interventions, including licensing.
Licensing could be effective in managing new market entrants, as well as in monitoring trustee competency and standards of mastertrust governance. Specifying desired behaviours in licence conditions, and requiring authorisation and close monitoring by the regulator, would impose barriers to entry and drive high standards.
However, a mandatory regime could impose higher costs on mastertrusts, such as:
authorisation and supervision;
capital requirements;
frequency and scope of regulatory reporting; and
more extensive enforcement powers.
It is likely these costs would be passed onto members. A dedicated licensing regime would require legislative change and involve delay at a time when hundreds of thousands of people have already been auto-enrolled into mastertrusts, and membership continues to grow.
The preferred alternative backed by the regulator is for these schemes to obtain independent assurance reports about standards of administration and governance.
In May 2014, a new assurance standard for mastertrusts was published by Institute of Chartered Accountants for England & Wales, which has been developed jointly with the regulator.
Mastertrusts that obtain the standard are demonstrating they have a suitable control environment to address the following key principles:
Schemes are designed to be durable, fair and deliver good outcomes for members.
A comprehensive governance framework is established at set-up, with clear accountabilities and responsibilities agreed and made transparent.
Those who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them out.
Schemes benefit from effective governance and monitoring through their full lifecycle.
Schemes are well-administered with timely, accurate and comprehensive processes and records.
Communication to members is designed and delivered to ensure members are able to make informed decisions about their retirement savings.
In a deregulatory environment and period of austerity measures, the regulator considered that voluntary assurance is a proportionate response in the context of its overall risk-based approach to regulating defined contribution schemes.
Assurance is likely to be less costly than some of the alternative approaches, such as licensing. The regulator expects there will be a small number of mastertrusts, and believes that its existing powers and voluntary assurance form a solid basis for regulating this sector.
However, the regulator will monitor how the market responds to the introduction of voluntary assurance and will consider moving to a more rigorous framework if take-up is poor.
Andrew Penketh is head of pension funds at Crowe Clark Whitehill
