Assurance reporting on master trusts: response to consultation

Background

The ICAEW consultation on its proposed framework for assurance reporting on master trusts, produced in partnership with the Pensions Regulator, is designed to help trustees of DC Master Trusts demonstrate to potential and existing customers that their scheme is being run to a high standard.

In this response:

• General comments
• Assurance reporting
  
• Control objectives on governance and administration

General comments

We understand that the aim of the draft assurance framework is to provide employers, in particular those who are shopping around for an automatic enrolment scheme, with assurance and confidence in the Master Trust sector and to help them select an appropriate Master Trust scheme for their workers.

In our view, such an approach should be beneficial to the members of such schemes, who are likely to benefit from the application of consistent standards across this type of arrangement.  We note that it is not intended (at least at this stage) that the provision of a trustees’ report, or an independent assurance report, should be mandatory.  However, we anticipate that most providers of Master Trusts will want to adopt the reporting standards as a matter of good practice.  As such, we consider that this will help to promote a consistent standard for Master Trusts.

Whilst the draft framework introduces a significant layer of compliance for trustees of Master Trusts (albeit not mandatory), the way in which it supplements TPR’s DC code and guidance is helpful.  That said, it is not clear how TPR and the ICAEW intend the voluntary reporting framework to fit with overriding legal standards and obligations for trustees.   It would therefore be helpful for the Master Trust framework to identify (as the DC Code does) which measures relate to legal requirements and those which are best practice.

Whilst we consider that existing Master Trust providers are likely to use the ICAEW framework, there may be a risk that the introduction of the new reporting ‘requirements’ could deter new entrants to the market, effectively limiting competition in this area going forwards.

Interaction with other measures on governance

We understand that the policy intention of these and other measures is to create a level playing field across the pensions industry in terms of governance standards.

In the light of the OFT DC workplace pension market study, the ABI has agreed that their members will establish independent governance committees.  Although such committees will oversee governance in contract-based schemes (generally personal pension arrangements), it would be helpful for guidance on the extent to which the present proposals interact with the requirement for a governance committee.

We have had feedback from more than one Master Trust client that they feel the framework will drive up costs for Master Trusts compared with contract-based schemes, potentially increasing regulatory arbitrage.

Assurance reporting

Application of TPR’s DC quality features

The consultation lists four of TPR’s quality features which are not subject to the draft assurance framework, on the basis that they are considered to be either too subjective or dependent on the nature of the scheme for it to be practical to provide independent assurance.  However, in our view, most aspects of these features could be objectively measured.

By way of example, trustees should be able to demonstrate what they are doing in terms of maintaining governance standards, offering flexible contribution structures and supporting employers in understanding their responsibilities.  This could be done by reviewing communications from the trustees to both members and employers, among other things.

The only one of the four quality features listed that we agree is too subjective to be measured for the purpose of the assurance report, is the requirement for trustees to “act in the best interest of all beneficiaries”.

We therefore question why the scope of the framework has been narrowed to exclude the other three quality features.

Control objectives on governance and administration

We consider the use of objective standards to be an effective means of enabling trustees to focus on key aspects of governance and that the proposed approach represents a sensible means of managing risk.  We have not sought to comment on every objective.

Investment options

Default strategy

The control objectives place the onus for selecting default funds on trustees.  In practice, the nature of Master Trust arrangements means that they attract a diverse range of employers.  Therefore, whilst the trustees might make available a range of funds for use as default funds, employers are generally likely be in a better position than the trustees to select the appropriate default fund for their own workers because it is the employers that will have a relationship with the members.

Appropriateness of other investment options

Point 22 of the draft independent assurance framework states that “The range and risk profile of investment options offered by the Master Trust are assessed for suitability, having regard to the likely membership, and approved by the trustee” [our emphasis].  Point 24 makes similar reference to the assessment of appropriateness and suitability.

Again, given the nature of such arrangements, it is likely to be difficult for the trustees to assess suitability of the available investment options for the membership as a whole at any point in time.  A new Master Trust will have few or no members in its early stages, and the membership profile can change rapidly as new employers join.  Similarly, it is unlikely to be feasible for trustees to be able to carry out ongoing monitoring of the investment options under the Master Trust in terms of their suitability for the breadth of the membership of the Master Trust as a whole.

In our view, it will be more natural for the employers in the Master Trust, rather than the trustees, to select a suitable range of funds for their workers.

We therefore suggest that the wording highlighted above is deleted.  In addition, we would welcome guidance as to how auditors will assess this provision.

Access to financial advice

Point 22 also refers to need for the trustees to “provide access to financial advice”.  It would be helpful for trustees to understand the expectations here, so examples illustrating the extent of the measure would be welcome.

Fit and proper trustees

The section on “fit and proper trustees” appears to cater for typical trust-based pension schemes.  However, it should be borne in mind that Master Trusts differ from traditional arrangements in a number of ways, particularly in connection with the appointment of trustees.

In our experience, trustees of Master Trusts will often be professional independent trustees.  As such, they are likely to have in place their own protocols and standards to deal with their suitability for the role.

In addition, this section does not appear to anticipate the use of corporate trustees which again are likely to be widely used by Master Trusts.

Deferred members

As noted above, the draft framework puts the onus on trustees where sometimes it may be more appropriate for employer involvement, for example in the selection of default and other investment options.  However, it is likely that some members of a Master Trust will not be linked to a participating employer for the purposes of their membership, for example, where there has been a transfer of deferred members to a Master Trust.  In such circumstances, therefore, it may be that the trustees have additional responsibilities.  Thought should be given to overall responsibility for this category of members.