The “regulatory arbitrage” between insurance company contract defined contribution (DC) schemes and master trusts is a recipe for market distortion, a senior industry figure has warned.

Roger Mattingley, former president of the UK Society of Pension Professionals (SPP), said the fact insurance companies had to hold capital reserves against income-drawdown products – but that master trusts did not – skewed the competitive environment against the former.

Income-drawdown solutions are expected to become more widely used from April 2015, when government plans to remove compulsory annuitisation are realised.

However, Mattingley told IPE the lack of consistency of income-drawdown products was another example illustrating that the two parallel regulatory systems for DC providers were not aligned, even as the industry prepares for savers to be allowed full access to savings.

Currently, the Financial Conduct Authority (FCA) regulates insurance DC provision while The Pensions Regulator (TPR) oversees trust-based schemes.

From April 2015, insurance companies will also have to have independent governance oversight on their DC scheme offerings, making requirements more in line with trust law but leaving capital requirements solely on insurers.

Mattingley sits on the board for both master trusts and insurance-based contract DC schemes but said the FCA’s claims that regulations were being aligned did not really compute.

“Governance requirements for insurance companies could be positive for members and the industry as a whole, but the system needs to be balanced, and it is not,” he said.

“If master trusts meet governance requirements to offer drawdown, it questions the need for capital reserves [on insurance companies].”

However, he conceded that the most likely outcome was balanced regulations for both master trust and insurance offerings including governance and capital requirements.

Mark Baker, legal director at law firm Pinsent Masons, said several insurance companies had set up master trusts in the wake of auto-enrolment, which could see them bypass capital requirements.

“It might be we live with the situation rather than there being commercial reasons for the government to iron out the arbitrage,” he said.

Baker agreed with Mattingley and said master trusts were likely to be treated more like retail insurance offerings, as the market began to use them more as such.

“If the regulators do [regulate master trusts like retail products], it would capture this concern,” he said.

Baker said TPR and the FCA – rather than merge regulations entirely – could change the way they operate, adding retail requirements to master trust products.

“Trusts and contract products cannot ever really be aligned – they are just two different legal models, and there will also be a difference,” Baker added.

“Over the longer term, the difference will be more clear and the idea of alignment less prominent.”

Topics