Rethinking regulation: TPR’s evolving model of segmented supervision and innovation

New regulatory framework focuses on value for money and innovation, as well as managing risks.

It’s clear that the workplace pensions landscape is undergoing a significant transformation, driven by regulatory reforms and a desire for “fewer, bigger, better governed schemes”. 

With the upcoming Pension Schemes Bill and a suite of proposals set for implementation by 2030, the way occupational defined contribution (DC) schemes and master trusts operate will shift considerably.

Segmented supervision: A tailored approach

The Pensions Regulator (TPR) is adopting a more proactive, “prudential-style” risk-based model, which aims to identify and address both systemic and scheme-specific risks and is also looking at supporting innovation in the industry. 

The aim is to not only identify and mitigate systemic and scheme-specific risks, but also to foster innovation, improve governance, and ultimately drive better value for members.

The new framework will consist of a segmented supervision model. Rather than applying a one-size-fits-all approach and treating all DC schemes the same, schemes are categorised into four distinct groups:

1.     Monoline master trusts – the larger schemes that carry a higher risk to the market 
2.     Commercial master trusts - including those that form part of an insurance offering 
3.     Non-commercial, industry-wide master trusts and collective DC schemes 
4.     Single and connected employer DC schemes

Each segment will receive a level of supervision tailored to its risk profile and systemic importance. Monoline and commercial segments, for example, will be supported by a dedicated TPR multi-disciplinary team with expertise in financial analysis, business strategy, investment and governance. 

This targeted oversight is designed to enable meaningful engagement and faster intervention, if needed. It allows TPR to consider the complexity and risk profile of individual schemes and how they deliver value for money to savers, particularly around investment strategy and retirement innovation.

Lessons learned from Master Trust supervision

Master trusts have long operated under close supervision from TPR, making them a valuable test bed for a refreshed model. While this style of direct dialogue and high expectations may be new for some single employer trust arrangements, there are important lessons to be drawn from the seven years of master trust oversight. 

Robust governance standards

Robust governance is the cornerstone of a well-functioning pension scheme. Master trusts must demonstrate robust systems and processes, effective risk management and strong decision-making protocols, all carried out by an experienced and knowledgeable trustee board. 

This governance is often subject to external assurance, most notably the AAF TECH 05/20. This audit standard, developed by the Institute of Chartered Accountants in England and Wales (ICAEW), assesses the design and operational effectiveness of internal controls. It verifies the robustness of governance controls and that they work effectively, and covers areas such as:

• Trustee decision-making and oversight
• Investment governance
• Member communications
• Data integrity and cyber resilience
• Administration and service provider oversight.

The results of these audits are shared with TPR and help demonstrate that governance is not just theoretical but effective. 

While good governance is not exclusive to master trusts, aligning all DC schemes to these same high standards will help deliver better outcomes for members and raise the bar across the industry.

Trustee Board Structure, Experience, and succession planning

An effective trustee board is critical to supporting sound governance and robust decision-making. Achieving the right mix of professional expertise, empathy and lived experiences is essential.

Commercial master trust trustee appointments must meet “fit and proper” criteria and demonstrate collective board competency. These appointments are typically *non-affiliated and together with an independent chair enhances objectivity and oversight.

Maximum term limits apply, and vacancies must be filled by following an open and transparent recruitment processes.

While continuity is important for any trustee board, a periodic and structured board cycle helps introduce fresh perspectives and ensure the trustee board remains aligned with evolving member needs and scheme dynamics. 

Protecting members: Financial resilience and contingency planning

Master trusts are required to maintain sufficient capital reserves to ensure they can continue to operate during periods of stress, protect members’ benefits and to fund an orderly wind-up if necessary. These reserves must meet a minimum threshold that will cover scheme expenses such as advice and administrative costs and must be held in a way that is accessible and securely ring-fenced for the benefit of the trustees. 

Contingency planning is also crucial. Master trusts must have a clear and detailed continuity strategy that outlines how members will be protected if there is a significant disruption; it needs to consider how a master trust may be closed or how the event will be resolved. 

Unlike master trusts, single employer schemes aren’t required to hold financial reserves – it’s assumed the sponsoring employer will step in if needed, but this may not always be reliable, especially during financial difficulties. To better protect members, more consistent safeguards across all scheme types should be considered, although there may be limited appetite from employers to set aside capital in this way.

Acknowledging the imperfections and looking ahead

While the master trust authorisation and supervision regime has delivered significant progress, the journey has not been without its challenges. Some of these issues will require support from government and policymakers to resolve. 

The new regulatory approach will focus on driving good outcomes through:

• Moving away from a “one-size-fits-all” model and promoting flexibility, proportionality, and expert-to-expert dialogue 
• Enhancing data infrastructure that enables real-time, reliable supervision 
• Reviewing legal frameworks, statutory powers, and regulatory duties to ensure TPR has the tools to act effectively
• Launching an innovation hub to test emerging models and decumulation strategies 
• Reassessing entry standards to strike the right balance between high standards and encouraging new market entrants.  

A vision for smarter regulation

TPR’s evolving approach signals a broader vision and one that goes beyond preventing failure, to actively support success and good outcomes for members. The authorisation regime has pretty much achieved what it set out to do and offers a valuable blueprint for all schemes, focused on delivering good outcomes for members; that focus should now evolve from compliance and consumer protection, to include continuous improvement and innovation in member experience and outcomes. 

The future will also require even more collaboration between regulators, trustees, providers and policymakers. Open dialogue and sharing expertise and feedback will be essential, working toward the same long-term goal of financial security and dignity in retirement.

References:  

* The Occupational Pension Schemes (Scheme Administration) Regulations 1996