Master Trust Authorisation

So the pension regulator has released the new authorisation process for master trusts. For those who are unaware, there are approximately 75 master trusts in the market, set up for a variety of different reasons and by different organisations. On the face of it, this process doesn’t seem too onerous, after all, those that have already gone through the master trust assurance framework are safe aren’t they? The devil is in the detail. 

The fee to the regulator is ￡41,000 (recently reduced down from ￡67k) however the true cost of compliance is much greater than that. The new authorisation process demands:

• Fit and proper tests all those involved with the running of the scheme are honest and competent
• Systems and processes there are adequate systems, effective processes and controls are in place
• Financial sustainability the scheme needs to have enough financial support to ensure it can operate on a day to day basis and to cover the cost of a triggering event (if one occurs), without increasing the cost to members
• Business plan the plan must cover a period of at least three years and a maximum of five years. Cost and revenue projections will need to be consistent with the historic financial performance and the financial questionnaire
• Continuity strategy this must set out the plan on how the trustees will protect members’ interests during a triggering event period, including the strategy for deciding which continuity option to pursue
• Scheme funder details of the legally enforceable financial support the scheme funder will provide to the master trust.

To do this well, we would estimate the cost of the management time would be 3 to 4 times the fee required by the regulator - around ￡160,000. For some operating in the market, they may not have included this cost in their original business plan. For those that didn’t, that don’t have access to capital and wish to continue their operation, authorisation is going to be a real challenge. 

Add to that an already tight timeline, with readiness applications by the end of May and final applications open from October. 

One option is to merge with another scheme, and we expect the market will start to go through a rapid period of consolidation. Once master trusts have been authorised, new regulations will vastly simplify the process. But before then, the transition process is not as straightforward as it would first appear. At Smart, we have several live conversations with other master trusts but to do this in the right way, so that members’ are properly protected, we require at least three months of project planning to implement therefore time is tight and we may have to limit the number we take on.

The good news is, that by going through this process, we will raise the benchmark of governance in master trusts and as we all know good governance helps trustees make good decisions which will help and support the millions of new members brought into saving through auto-enrolment, to achieve good retirement outcomes.

This has to be a good thing. It’s why we’re all here, after all.