Government-backed workplace pension scheme the National Employment Savings Trust (Nest) would have to hold £450m in financial reserves to comply with new master trusts rules, according to one of two methods to calculate this financial buffer.
According to documents published by The Pensions Regulator (TPR), under one of the options, master trusts will have to hold £75 per member for calculating the financial reserves needed to meet the costs following a triggering event.
Nest, which is the biggest scheme in the UK, reached the six million members milestone in December.
Which means that, under that option, it would have to hold at least £450m in financial reserves.
With almost four million members, The People's Pension would have to hold around £300m, while Now: Pensions, with 1.5 million customers, would need financial reserves of £112.5m.
A triggering event may indicate a master trust cannot continue to operate.
It must be reported to the regulator, and means that during the triggering event period, a master trust cannot increase charges or take on new employers.
These new rules are coming into force with the master trust registration legislation, which the government and the regulator have been discussing since 2016.
Schemes will need to be registered, with the legislation expected to come into force in October 2018.
The Department for Work & Pensions (DWP) published in March its response to the consultation on the new rules, with the watchdog releasing its code of practice for master trust authorisation, alongside a consultation, one week later.
When applying for authorisation, a master trust will have to provide evidence to the regulator in five areas to stay in the market: Fit and proper persons, financial sustainability, scheme funder, systems and processes and continuity strategy.
Richard Lockwood, chief financial officer at Nest, said:"We’re confident that we’ll meet all aspects of the code of practice, including demonstrating financial sustainability. We’ll consider what’s in the best interest of our members and will submit our proposal to The Pensions Regulator in due course."
The £450m in financial reserves that Nest would have to hold are calculated under the basic method.
It is also possible for a master trust to hold a level of financial reserves that accurately reflects its own tailored calculation of the necessary costs, which is called the detailed method.
According to the regulator, this "will be of use where economies of scale or technology mean that the trustees believe that the master trust can hold a lower amount than under the basic method".
Master trusts using this method, however, should expect that the watchdog will ask additional questions about the assumptions used in calculations before it is satisfied, The Pensions Regulator said.
The regulator released a series of documents – including the financial reserves calculation method – so that providers can start submitting voluntary applications for the new registration regime as soon as May.
However, these will not be binding, as the workplace pension providers will have to submit a formal application when the window for registration opens later in the year, the watchdog warned.
maria.espadinha@ft.com
