Called Assurance Reporting on Master Trusts – Master Trust Dupplement to ICAEW AAF 02/07 (TECH 07/14AAF), this technical standard becomes the latest part of TPR’s framework to regulate the governance and administration of occupational direct contribution trust-based schemes. It enables a master trust to voluntarily decide to have independent verification by an ICAEW-qualified reporting accountant that all but three of the 31 DC quality features have been achieved through evidencing around 100 to 200 control procedures relating to 38 specific key control objectives described in the master trust supplement (appendix 1). These are covered under five key headings: safety of assets and records, assessing value, assessment of investment options, people and governance. In addition, the report will outline key features of the control environment of the master trust, such as ownership, reporting lines and responsibilities, risk assessment and quality management. A TPR list of master trusts that have obtained independent AAF 02/07 assurance reporting will be publicly available.
The first reports are expected this year for a specific “point in time”, such as 31 October 2014, and cover the description and design of control procedures meeting the 38 control objectives. After that, reports will cover a period, such as year ending 31 October 2015, and review the operating effectiveness of the control procedures as well.
These new good practice standards give more specific information to IFAs, accountants and other pension professionals dealing with smaller employers automatically enrolling their employees into pension schemes. Master trusts have been spoken about as an attractive option for these small employers and larger employers who want other alternatives. As a stand-alone occupational DC pension scheme, a master trust can manage investments of many different types of individual employers and their employees. Being set up by a trust deed it is not FCA-regulated – and there was concern that more guidance and standards on how a master trust should be run should be put in place.
Inspite of being a voluntary standard, the master trust AAF 02/07 assurance report will affect the pension industry. Some of the main implications are:
Safeguarding of member assets: A master trust should demonstrate to an employer or adviser what level of financial protection would be available to a member should the master trust fail. Trustees should also explain their reasons for selecting investments where compensation arrangements are not in place.
Investment decisions relating to the selection of investments need to be researched, authorised and monitored: The selection of unregulated investments will require formal recording by trustees with regular documented review. Any communication to members must clearly indicate investment choices that are not subject to regulation and what impact that can have on member financial protection.
All costs and charges are known: A complete and accurate list of the types of costs and charges incurred are clearly disclosed to employers when choosing a pension scheme for their employees, and members are given regular disclosures of information. This will enable employers to compare one master trust with another and set a standard for other arrangements.
The design, on-going suitability and performance of the default strategies is regularly reviewed and monitored: Trustees will need to review how their default strategy meets the needs of members. This review will need to take into account the DWP’s ‘Guidance for Offering a Default Option for Defined Contribution Automatic Enrolment Pension Scheme’. The implication here is that the employer and pension adviser should be getting a more comprehensive standard of reporting that others will have to match.
Contributions are invested in accordance with member instructions: This addresses a key concern of whether what is collected from a member actually goes into the right investment funds. This will require specific controls to be put in place for trustees to provide sufficient evidence to be independently verified.
Retirement products selected by members are monitored and the range of retirement products made available is reviewed for ongoing suitability: Trustees are required to determine reasonably whether members are offered a full range of retirement products and taking advantage of them, and review this at least every three years.
Communications are accurate, clear and understandable and are produced in accordance with a documented communications plan: Employers and their advisers should be able to request what the specific plan is to make high-quality member communications that are timely, understandable and engaging. The trustees are expected to produce a plan for different members at different stages of their pensions lifecycle, and have processes to place to assess their effectiveness.
Employers and advisers now have another tool for selecting who to use for automatically enrolling workers. The assurance report will create more understanding and build confidence in what goes on in a master trust. The master trusts that actually use this standard will become a differentiating factor. The impact may be that not all master trusts will stay in the auto-enrolment market and so voluntary assurance reporting may become a mechanism of filtering out some of the 70 or so master trusts currently quoted as existing.
A master trust assurance report does not promise to cover everything. Its aim is to create control objectives to line up with TPR’s existing DC quality features. It does not go beyond that. Employers looking at auto-enrolment selection will not be solely looking at the DC quality features. Other areas need to be considered. The employer and adviser should read through the 38 control objectives carefully to see what is missing. For instance, more questions may want to be asked on the interaction of contribution deductions with payroll.
What master trust assurance reporting will do overall for the auto-enrolment market is to set a benchmark for how the key areas of DC quality feature governance, administration and communication could operate.
Andrew Riley is director of Assurance Services of Assure UK
Key Points
On 1 May, the ICAEW and the Pensions Regulator jointly issued good practice standards in relation to master trusts.
The new good practice standards give more specific information to professionals dealing with smaller employers automatically enrolling their employees into pension schemes.
Employers and advisers now have another tool for selecting who to use for automatically enrolling workers.
What the new master trust standards mean:
• A master trust could choose to adopt AAF 02/07 assurance reporting to get its robust control framework noticed in the marketplace and stand out among its close competitors.
• An employer or intermediary could make having an independent AAF 02/07 assurance report a key factor in deciding whether to select a particular master trust.
• An expectation will be built that advisers should know what a master trust is doing to meet the assurance standard whether or not it actually has independent ICAEW reporting.
• The direct contribution quality features have been ‘fleshed out’ with specific control objectives being described as good practice.