More detailed governance requirements for master trusts will not deliver good outcomes in isolation, expert warns

Out-Law News | 18 Oct 2013 | 4:04 pm | 3 min. read

More detailed governance requirements for those operating defined contribution (DC) 'master trusts' will not deliver good outcomes and value for money in isolation, an expert has said.

"Maintaining the spotlight on governance will go some way to help deliver good outcomes and value for money - but the great unsaid is that we are simply not contributing enough to meet expectations in retirement," said pensions expert Tom Barton of Pinsent Masons, the law firm behind "We need to equip members to do more too."

Barton was commenting as the Institute for Chartered Accountants in England and Wales (ICAEW) published its draft 'assurance framework' for master trusts (30-page / 175KB PDF). The document, which was produced in consultation with the Pensions Regulator, is designed to demonstrate to potential and existing customers that their scheme is being run to a high standard.

According to Barton, the standards set out in the draft framework will lead to extra costs for providers of master trusts that may not necessarily be justified. The proposal involves master trusts should obtaining annual independent assurance that they are complying with the processes and procedures set out in the framework. Although this process will be voluntary, the consultation makes it clear that providers will be expected to comply.

But Barton warned that the trend towards additional governance requirements had a much wider significance. "The real question is whether this is the thin end of the wedge for all employers with trust-based money purchase schemes. There is a huge shift towards more detailed governance requirements, with trustees expected to demonstrate that they have satisfied a range of standards - thus going some way to demonstrating discharge of their legal duties," he said.

"There is a danger that trustees who 'tick the boxes' fail to think much further about their legal duties," he said. "This could be a risky business."

Master trusts enable pension scheme providers to manage a DC scheme for several employers under a single trust arrangement. They are particularly popular for smaller businesses which are legally required to automatically enrol their workforce into a suitable pension scheme but may not necessarily have the resources and skills to run a dedicated pension scheme.

The introduction of an independent assurance requirement for master trusts was mooted this earlier this year as part of the Pensions Regulators' new regulatory code for DC schemes. The approach has already been wider discussed with providers at a series of meetings held by the regulator, but it is now seeking further feedback. The ICAEW intends to publish a final document in the spring of 2014, ahead of the introduction of auto-enrolment for smaller employers on 1 April 2014.

The framework focuses on six broad areas based on the Pensions Regulator's existing principles for DC schemes. These include the essential characteristics of schemes; the need to establish a comprehensive governance framework with clear accountabilities at the start; appropriate scheme administration; and good communication with scheme members, designed to ensure that they are able to make informed decisions about their retirement savings.

Schemes should be designed to be durable, fair and deliver good outcomes for members, while all those accountable for scheme decisions must understand their duties and be "fit and proper" to carry them out, according to the framework. These characteristics and principles should be backed by effective governance and ongoing monitoring throughout the life of the scheme.

Trustees would be expected to report on the operating arrangements of the master trust on a regular basis, and support their findings with an independent assurance report covering the description and design of the scheme and its compliance with the framework. Although neither of these reports is intended to be mandatory, the consultation states that market participants "may find it advantageous to be able to provide such a report to potential and existing customers so they can obtain a better understanding of the governance and administration arrangements in order to protect the interests of the employing companies and their employees".

"Gaining independent assurance will help manage confidence in this growing segment of the DC market and demonstrate the presence of governance and administration standards that meet our DC code and regulatory guidance," said Andrew Warwick-Thompson, the Pensions Regulator's head of DC governance and administration.

"We encourage employers to select master trusts that have obtained this assurance on the control objectives set out by the ICAEW. The ICEAW and the regulator have engaged with NAPF and PASA to assess how best their quality standards can dovetail with master trust assurance and these discussions continue," he said.