The Pensions Regulator (TPR) has published revised capital reserve guidance aimed at ‘unlocking’ millions of pounds of investment for innovation as the defined contribution (DC) master trust market continues to grow.

As the master trust market matures, TPR has reviewed its approach to ensure regulation continued to protect members while reducing unnecessary burdens and supporting economic growth.

The regulator said this would allow some master trusts to unlock investment for innovation by reducing the level of cash reserves they hold, and meet capital requirements with a more efficient mix of assets instead.

It has therefore reviewed its reserving guidance as part of its commitments to the government to lessen regulatory burden and support economic growth.

In a blog, TPR director of DC and master trust supervision, Kim Goodall-Brown, noted that master trusts' reserves had nearly doubled between 2019 and 2024, rising by approximately £725m to nearly £1.5bn.

Cash reserves had also increased over this period to around £200m, with some schemes holding greater reserves than the original policy intent.

The regulator expected to publish annual data of reserving practices from 2027 to ensure transparency and enable master trusts to understand how they compare.

Financial reserves were forecast to continue increasing as schemes grew and explored a different mix of assets to meet reserving requirements, while stronger governance and risk management meant the likelihood of calling on reserves due to disorderly market exits continued to fall.

Goodall-Brown said TPR’s updated guidance reflected these trends, and allowed trustees and scheme strategists to review their approaches on calculating their reserves.

“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,” Goodall-Brown continued.

“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.”

TPR committed to improving the quality and consistency of the collected data, and making improvements to its data collection via the scheme financial template, and associated guidance, during 2026.

As the market moves towards megafunds, as outlined in the Pension Schemes Bill, the regulator acknowledged it would need to ensure the regulatory framework continued to evolve, and enable 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,” Goodall-Brown said.

“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.”

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