Out-Law Analysis | 14 Jan 2015 | 12:02 pm | 2 min. read
Master trusts are already covered by dozens of pages of detailed guidance and regulation. If they are to flourish in the market created by the government's decision to give defined contribution pension savers more choice about how they use their savings then they should be given time to develop that market themselves.
The new flexibilities being introduced this April will be a catalyst for the pensions industry, with savers no longer forced to buy annuities on retirement, and instead able to keep sums invested and 'draw down' income from those investments.
This change is a big incentive for master trusts to bring new assets under management, especially now that most larger employers have auto-enrolled workers into pension schemes. Indeed, it is potentially more exciting than auto-enrolment because the assets will not take time to build up.
For many master trust providers the post-retirement market is new territory, and there are a number of practical issues they will face.
Admitting individuals to the trust will mean changes to their processes, and some legal thinking. Providers will face commercial decisions, such as whether they are willing to administer small pots and accept transfers that will flow straight out as uncrystallised funds pension lump sums (UFPLSs). These might not be attractive for all providers, but they will be invaluable to DC schemes who are looking for a post-retirement partner.
Providers must ensure that the administration system is geared up for drawdown, and they will need a strong member-facing platform. New entrants to the market, particularly from an asset management background, will probably need to partner with a platform provider.
Trusts will need to fall precisely within the definition of an occupational pension scheme to avoid being regulated by the Financial Conduct Authority (FCA). This will need careful planning, particularly for providers that are not using an established trust – a point that is underlined by the recent Pensions Ombudsman decisions on pensions liberation.
But the regulatory environment poses a wider and longer-term challenge. Just at the time when the pensions industry needs providers to emerge and fill the post-retirement gap, we know that the Pensions Regulator has its well-publicised aim of ensuring that there are only a small number of large master trusts.
The Pensions Regulator and the Department for Work and Pensions (DWP) have supported this aim with some significant barriers to entry, the voluntary audit assurance framework and the requirement for at least two independent trustees. Established master trusts have been working hard enough to meet these requirements. Now any provider looking to set up a new post-retirement trust will be faced with the same compliance burden.
Added to that, for all master trusts there is uncertainty about how the Regulator and the DWP will govern the post-retirement phase over the coming years. In the last two years the authorities have published dozens of pages of guidance and regulation that are relevant to master trusts.
Generally the focus of all the guidance is on the accumulation phase and the decision making processes at retirement. If master trusts succeed as a versatile post-retirement vehicle, we can only expect that the Regulator will publish further guidance on that function. Indeed, the risks to members if a drawdown product is badly run are arguably greater than risks in the accumulation phase, which is why the Regulator would be right to add to the guidance already published.
The Regulator will need to handle this carefully. Extra guidance or not, those master trusts focusing on the post-retirement phase deserve to succeed. There is room for innovation, and it is good for providers to push their products forcefully and competitively. And while the Regulator will certainly need to issue guidance before long, it could help by allowing some breathing space and seeing how the market starts to settle down first.
Mark Baker is a pensions expert at Pinsent Masons, the law firm behind Out-Law.com