DWP plans capital adequacy rules for AE master trusts

DWP plans capital adequacy rules for AE master trusts

Auto-enrolment pension schemes will soon be subject to major new capital adequacy requirements, as the government puts the final touches to a bill that will radically overhaul the sector.

FTAdviser understands the Department of Work & Pensions is planning to impose a set of “fit and proper” governance standards, overseen by The Pensions Regulator and similar to those already applied to Financial Conduct Authority-regulated businesses, which will ensure trustees of auto-enrolment master trusts are properly qualified.

The DWP invited a number of master trust pension providers to a meeting on Friday (15 July) to discuss the details of the upcoming pensions bill.

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Precise details were not disclosed, but two attendees told FTAdviser capital adequacy and fit-and-proper standards were discussed and are highly likely to be in the final legislation in some shape or form.

Following the meeting, Salvus Master Trust managing director Graham Peacock said he was confident both capital adequacy and governance standards would “come out in the bill”. He was strongly supportive of both measures, saying it was “madness” not to have such safeguards in current legislation.

Smart Pensions chief operating officer Peter Walker, who was also in the meeting, said he was confident the measures would be included in the bill.

He did not reveal how much capital master trusts would have to hold. However, he said Smart Pensions and the wider industry was supportive of such a measure.

“A mandatory minimum capital adequacy requirement, based on the size of assets under management, is what we were expecting to see in the Autumn Pension Bill that was promised,” he said.

“This would mean the master trust would have to hold enough cash in the bank to cover costs in the worst case scenario without charging members. This would need to cover costs of transferring to another scheme or of winding up, in a structure that gives trustees control of the funds should the scheme sponsor fail.”

Another measure discussed was that of making the Master Trust Assurance Framework (Maf) mandatory. However, Mr Walker said this was unlikely to happen, because it would be “legislatively difficult”.

He said the industry overwhelmingly favoured “principles-based regulation” to “rule-based regulation”.

Mr Walker also said the industry broadly opposed the idea of setting up a master trust lifeboat fund akin to the Pension Protection Fund, which had been suggested as an alternative to capital adequacy requirements.

Together, these measures would represent a shift in an industry that until now has been light on regulation.

Work and Pensions select committee chair Frank Field MP put this at the centre of a recent inquiry into the auto-enrolment sector, saying the hands-off approach had allowed “cowboys” to operate in the industry.

Currently, auto-enrolment providers fall into two categories: group personal pensions, which are provided by FCA-regulated life companies; and master trusts, which include major players such as Nest, Now: Pensions and The People’s Pension.

Unlike GPPs, master trusts members are unprotected if their pension scheme fails.