The Pensions Regulator’s new approach to supervision

In November 2024, TPR announced a proposed shift to a more prudential style of regulation and to progress this approach, TPR published the outcome of a 12-month review into its supervisory approach on 20 February 2025.

TPR’s review coincides with the proposed shift to a system of fewer, larger DC “megafunds” announced by the Chancellor in her Mansion House speech and the wider focus on value for money across the DC landscape. For an overview of the Mansion House proposals, please see our Autumn 2024 edition of DC Practical Notes.

What are the key changes to TPR’s approach?

As part of its move towards a prudential-style regulation model, TPR proposes to restructure its engagement and supervision of DC schemes by grouping them into four segments:

1. Monoline master trusts
2. Commercial master trusts
3. Non-commercial master trusts and collective DC (CDC) schemes
4. Single and connected employer schemes

TPR describes “monoline” master trusts as larger schemes that carry a higher risk to the market; “commercial” master trusts as including those that form part of an insurance offering; and non-commercial master trusts as including industry-wide schemes.

TPR will adopt a “direct expert-to-expert engagement model” which, in effect, means each monoline and commercial master trust will have a dedicated TPR supervision team with specialists in financial analysis, business strategy, investment and legal compliance and regulation. 

What are the potential implications of these segments?

1. Focus on monoline master trusts

TPR has publicly announced how it proposes to segment its supervision of DC master trusts, focussing on three groups: monoline, commercial and non-commercial master trusts. While we expect this segmentation will cause disquiet in the industry (in particular, the artificial and arbitrary split of monoline and commercial master trusts), in practice, TPR has been operating a segmented approach to supervision since authorisation in 2018-2019. 

Following authorisation, TPR announced it would apply a risk rating to each master trust and adopt a risk-based approach to supervision based on TPR’s internal risk ratings. While TPR did not announce these ratings publicly, its supervisory approach, scrutiny and engagement has varied significantly between different types of master trust.

While TPR’s use of terminology is far from clear, we interpret “monoline” master trusts to mean large auto-enrolment master trusts which specialise in pensions as a single discipline of financial services business. Typically, scheme funders would carry out activities relating to the master trust only and would not rely on the scheme funder exemption for authorisation. By “commercial” master trusts, we expect TPR is referring to those master trusts where scheme funders carry out wider activities – these include (amongst others) life-company master trusts and those operated by consultancies.

In our experience, the split between “monoline” and “commercial” master trusts broadly reflects TPR’s differences in approach to supervision to date. TPR has tended to apply more engagement and scrutiny to the auto-enrolment sector of the market and by labelling “monoline” master trusts as those which carry a higher risk to the market, TPR’s new approach simply formalises and publicises risk-ratings that have arguably been in operation and applied informally to master trusts for several years.

While TPR’s public announcement of these risk ratings provides a degree of clarity and transparency, it is crucial that TPR adopts a flexible and permissive approach to segmentation to avoid disproportionate focus on one cohort of the market and ensure fairness and consistency for all commercial master trusts. In this regard, we welcome TPR’s proposals to move schemes to different segments and levels of engagement, where appropriate, and to ensure that schemes with similar risk profiles and challenges are grouped together in a segment. In our view, this is the most important element of TPR’s new approach. Without this flexibility, we would be concerned segmentation could lead to an inconsistent, disproportionate and stagnant regime.

We look forward to seeing how this flexibility plays out in practice.

2. Role of CDC schemes

TPR has grouped CDC schemes with non-commercial, industry-wide master trusts. Given Royal Mail is the only (connected employer) CDC scheme in operation currently, this makes sense in the short term. But as CDC opens up to unconnected employer and commercial CDC schemes, we take the view TPR may need to re-assess this segment. It is likely that commercial CDC schemes will have higher risk profiles and encounter different, more complex legal and regulatory issues than those experienced by non-commercial master trusts, which may require greater regulatory engagement in the short-to-medium term.

3. Interaction with proposals for DC megafunds

Finally, TPR has separated monoline and commercial master trusts from non-commercial master trusts and single/connected employer DC schemes. This provides the regulatory framework for attributing greater regulatory expertise and resources to supervising those master trusts “in-scope” of the government’s Mansion House proposals for minimum scale thresholds. As suggested in our response to consultation on DC reforms to build scale, it would also allow TPR to influence behaviours more quickly and effectively through a “comply or explain” regime for authorised master trusts in relation to investment in UK productive finance assets.

What are the likely changes in TPR supervision?

TPR says its new model will allow it to better manage regulatory risks, anticipate potential threats to savers and address risks to the UK economy. In practice, we expect TPR’s new approach will result in:

1. more informal information requests and sharing of information with TPR; higher volumes of information sharing may lead to more formal s72 information requests to address certain systemic issues and areas of regulatory focus

2. each scheme having more contacts/touch points at TPR in relation to specialist areas – in practice, we expect wider engagement with a team of specialists at TPR rather than interaction with a scheme’s supervisor only

3. more stringent review of a scheme’s risk register to identify and monitor scheme-specific issues and actions taken to address these

4. greater scrutiny of master trust’s financial projections, financial sustainability, target market and growth plans

5. TPR building greater understanding and awareness of the risks and opportunities faced by each master trust under their supervision

6. TPR scrutinising schemes’ investment strategy in greater depth, in particular design of default arrangement(s) and private markets allocations, with a focus on UK productive finance assets