Defined Contribution  

Regulator increases funding requirements for small master trusts

Regulator increases funding requirements for small master trusts

The Pensions Regulator (TPR) has increased the funding requirements for smaller master trusts, which will have to hold £150,000 in financial reserves to meet the costs following a triggering event under new regulations.

The watchdog yesterday (3 July) published its response to the consultation on its code of practice, increasing this requirement for master trusts with less than 2,000 members from the previous £75,000.

The Pensions Regulator revised this rule, as some consultation responses highlighted that the proposed minimum "may not be sufficient for every scheme".

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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.

According to Kate Smith, head of pensions at Aegon, it is important that master trusts hold enough financial reserves to cover ongoing costs and any potential wind-up costs.

She said: “Pension scheme wind-ups can take months, probably years, incurring costs at every step.

“Requiring smaller schemes to just hold £75,000 as financial reserves to cover these costs was far too low. Doubling the ‘basic method’ for smaller master trusts to £150,000 is far more realistic.”

Adrian Boulding, director of policy of Now: Pensions, told FTAdviser this was a welcome measure, since some costs of winding up will be the same despite the size of the scheme, such as lawyers.

He noted, however, that the majority of master trusts will be calculating their financial reserves according to the detailed method.

He said: “The majority of master trusts have been working on a detailed process map in the case of winding up, which details the costs of each step.”

The Pensions Regulator has also made changes to the way financial reserves are calculated, a method that had been criticised by the industry.

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, the regulator’s code applies a statistical adjustment, commonly known as a haircut, to each asset class. 

According to the draft version of the code, if master trusts chose to hold their capital in scheme revenues, which come from charges to members, or scheme income, from participating employers, they would have to account a haircut of 90 per cent over 12 months.

Market players argued that these haircuts are too severe, unrealistic and will only serve to make products and services worse for scheme members.

The watchdog agreed with the responses received, and has reduced the haircut applied to scheme revenue and scheme income to 30 per cent over 12 months.

Tim Gosling, policy lead for defined contribution at the Pensions and Lifetime Savings Association (PLSA), said: "We are pleased The Pensions Regulator listened to the views of our members in relation to haircuts and has made changes to the costs, assets and liquidity plan (Calp), including the reduction of the haircuts applied to scheme revenue and scheme income.