The Pensions Regulator's (TPR) new rules on master trusts and the capital they need to hold in case of a failure risk leaving members worse off, industry experts have warned.
The watchdog published in March its code of practice for master trust authorisation, which outlines how master trusts will be expected to meet the new authorisation criteria.
It also included what they will need to evidence for the regulator to grant authorisation so they continue to operate in the workplace pensions market.
The document contained details about the financial reserves calculations these schemes will need to put in place if they want to be granted authorisation after October.
Under these calculations, in order to ensure there is enough money to wind the scheme up in the event of a fire sale of assets during a market downturn or other adverse economic environment, TPR’s code applies a statistical adjustment, commonly known as a haircut, to each asset class.
According to the code, if master trusts choose to hold their capital in scheme revenues, which come from charges to members, or scheme income, from participating employers, schemes must prepare financially for a haircut of 90 per cent over 12 months.
But in submissions to regulator, seen by FTAdviser, market players argue that is too severe, unrealistic and will only serve to make products and services worse for scheme members.
Trade body Pensions and Lifetime Savings Association (PLSA) argued, in its submission to TPR’s consultation, that a 90 per cent haircut on member charges “assumes that 90 per cent of members will transfer out within a year, which is in tension with the inertia commonly seen in workplace pensions”.
It said: “More generally, capital held for regulatory purposes is capital that cannot be used to develop better pension products and services for members.
“It will not help the market or savers if master trusts are overcapitalised.”
Now: Pensions, workplace pension provider with 1.5 million members, is also concerned about this haircut, as it “creates a risk of overcapitalisation of master trusts,” the scheme said in its submission.
It added: “We believe it is illogical to apply such a severe haircut to money that is owed to a scheme and only has to be collected from the members’ accounts.
“We consider this haircut to be hard to justify and would ask that the regulator considers more proportionate treatment of scheme revenues in capital requirement calculations.”
A TPR spokesperson said: “We welcome the consultation responses on the master trust code of practice.
“We are listening to feedback from the industry, including about haircuts. Where it is appropriate, feedback will be addressed in the final version of the code and accompanying response to the consultation.”
According to Mike Lacey, partner at Berkshire-based financial adviser firm Bowman Pension Consulting, TPR "is being over cautious in the valuation of revenues".
He said: "To discount the value of future scheme revenues by 90 per cent is, I feel, unrealistic. It would require a major increase in the capital required behind a master trust which will impact severely on their profitability.
"This is turn could lead to some master trusts closing for business, and stifle new entrants to the market – why bother if there is no profit to be made?
"Scheme revenues as defined are the actual charges taken from funds or billed to employers. They are notably 'sticky' as in my experience, there is very little wholesale porting of funds between providers."
The government and the regulator have been discussing the master trusts new rules since 2016, which are expected to drive consolidation in the market.
Authorisation will commence on 1 October and existing schemes will have six months from that date to apply to for authorisation.
However, master trusts can start submitting voluntary applications for the new registration regime as soon as May.
maria.espadinha@ft.com
