Moving with the times: Updates to master trust reserving guidance
Master trusts now dominate the defined contribution landscape holding over £200 billion of assets for pensions savers. In this blog Kim Goodall-Brown talks about how TPR has evolved its approach since the introduction of master trust authorisation seven years ago, by looking at how it can reduce regulatory burden and enable master trusts to unlock investment for innovation in the future.
Master trusts came into existence to meet the increasing need for pension provision for millions of savers following the introduction of automatic enrolment.
And in 2017, to make sure those schemes had the highest standards of governance and operational resilience, an authorisation framework emerged.
This saw a rapid consolidation of the market, reducing from more than over 100 players, to only those that could meet the standards that savers would expect.
This was new for the trust-based world. We saw regulatory obligations placed not just on the trustee, but also corporate entities too.
Financial sustainability of the corporate entity, and triggering events to signal warning signs to the regulator, was an important consideration to ensure both trust in this newly emerging system and to protect savers in the event of a scheme exit from the market.
Over the last seven years, we have learnt much about how the market is operating. And as the pensions landscape evolves and master trusts continue to grow, it is important that we continue to evolve our approach.
We have been clear that we want master trusts to be well run and well governed schemes with trustees and scheme decision-makers empowered to make the right decisions for them.
At the same time, we want to strip back unnecessary regulatory burden so that schemes can free up capital for productive use and focus on delivering the best possible outcomes for members.
That is why we have updated our guidance around regulatory capital reserving requirements.
Detailed analysis
Following detailed analysis of financial submissions of master trusts since authorisation, together with engagement with industry bodies and master trusts we found:
- financial reserves will continue to increase as schemes grow and some schemes could further explore a different mix of assets to meet reserving requirements, reducing cash holdings
- at the same time, strong governance and risk management mean the likelihood of calling on reserves due to disorderly market exits, continues to reduce
Our updated guidance reflects these trends and enables trustees and scheme strategists to review their approach to calculating their reserves, ensuring they are using the most effective asset mix.
Nearly double the reserves
In any market, some businesses thrive and grow, whilst others fall by the wayside. Master trust reserves mean that in any hypothetical triggering event their scheme has enough capital to continue operating until they can transfer members to another arrangement, without any additional cost to members.
It’s an important protection.
Overall, the total level of reserves across the market held has accelerated as schemes have grown quickly in terms of membership and assets under management (AUM).
This is expected to continue as master trusts continue to grow and consolidate. From the point of the initial authorisations in 2019, up to 2024, the total level of reserves being held almost doubled, an increase of around £725 million to almost £1.5 billion.
The level of cash held in absolute terms has shown a similar trend and we have observed some schemes maintaining cash reserves greater than the original policy intent. While some schemes have increased their use of different assets, such as revenue offsetting and credit under other regulatory regimes, cash holdings have still risen significantly over time to around £200 million in 2024.
Key areas of change
We have reviewed and updated guidance to reflect current best practice, and further align our expectations to reflect the changes in the landscape since the reserving requirements were designed at authorisation. It also reflects our direct experience of supervising the master trusts and managing scheme exits.
These updates allow for a more scheme specific approach and removes, or further clarifies, thresholds introduced at authorisation, including minimum liquidity levels and allowance for revenue offsetting. This should allow for a more consistent approach across the market and may allow master trusts to be able to release some capital reserves to invest in their business and deliver better value for savers.
Improving data transparency
Given what we now know about the security of the market and the operational resilience of entities, we want to help ensure that schemes calculate their reserving requirements from as informed position as possible.
Our review showed there is currently significant variation in how master trusts calculate the financial reserves they require.
The variation in approach has partly been driven by the design of the regulations and our code, which intentionally provides flexibility for scheme specific approaches to be adopted.
As set out in code of practice 15 (paragraph 164): “The information in the continuity strategy should provide enough detail on the key activities and steps in dealing with a triggering event to provide a realistic estimate of costs for complying with the continuity strategy.”
In practice, when it comes to forecasting the costs likely to be incurred subsequent to the triggering event, there are a wide range of assumptions being made by master trusts. This is partly due to schemes reflecting their different characteristics, continuity strategies, and corporate structures. It is also due to there being limited market data to inform the assumptions.
That is why we are committing to improving the quality and consistency of collected data, and will be making improvements to our data collection via the scheme financial template (and associated guidance to completing it) during 2026.
To tackle the challenge of limited market data and enable master trusts to understand how they compare and encourage engagement and transparency, we will also be publishing annual data on reserving practices, from next year (2027).
This is part of our ongoing commitment to use increasing transparency in the marketplace to enable a sustainable and resilient market.
Looking ahead to 'megafund' master trusts
This guidance is an important signal of our commitment to help reduce unnecessary regulatory burdens and drive growth in the interests of savers.
However, the broader master trust reserving requirements are set out within the master trust regulations and code of practice 15.
As the market moves towards megafunds as envisaged by the Pension Schemes Bill 2025 we will need to ensure that the regulatory framework continues to evolve and enables security, value and innovation.
We will work with the Department for Work and Pensions to identify potential alternative requirements and opportunities to update the legislation. Any proposed future changes would require public consultation to further gather industry input.
Good regulation evolves and flexes as markets change. The master trust market of today is very different to 2018 and will be very different again in 2035.
Kim Goodall-Brown
Director of DC and Master Trust Supervision
