As expected, the Government laid a new Bill, the Pension Schemes Bill, before Parliament last week. To address concerns about the sustainability of some DC master trusts and the level of member protection in the event of a master trust failing, the Bill sets out a new authorisation and supervision regime for master trusts that provide money purchase benefits. The Bill, which could apply more widely than anticipated, also sets out transitional arrangements for existing master trusts.
Following the introduction of automatic enrolment in 2012, there has been significant growth in the number of master trusts participating in the UK pensions market. It is estimated that there are now around 100 defined contribution (DC) master trusts operating in the UK.
According to figures published by the Pensions Regulator (the Regulator), since the introduction of automatic enrolment in October 2012, over half of employers have chosen to use a master trust as the auto-enrolment vehicle for some or all of their staff. This means that master trusts are now being used by tens of thousands of UK employers to deliver DC pensions to millions of individuals.
There has been growing concern about the robustness of the current regulatory and supervisory regime for DC master trusts, and the low barriers to entry. Concerns have also been raised about the level of protection afforded to members and their pension accounts in the event of a disorderly wind-up or failure of a DC master trust. The Government, under the previous pensions minister, had signalled that it would take action in a new Pensions Bill to address this – and the new administration has followed through on this promise.
A new regulatory regime for master trusts
The Pension Schemes Bill sets out a new authorisation and supervision regime for master trusts that provide money purchase benefits. For this purpose, the Bill defines a master trust as an occupational pension scheme that:
- provides money purchase benefits (ie “true” money purchase benefits within the meaning of section 181 of the Pension Schemes Act 1993), whether alone or in conjunction with other benefits
- is used, or intended to be used, by two or more employers
- is not used, or intended to be used, only by employers which are connected with each other, and
- is not a relevant public service pension scheme.
Under this new regime a master trust will need to be authorised by the Regulator in order for it to be able to operate. To obtain authorisation, the trustees of a master trust will need to apply to the Regulator and satisfy it that:
- the persons involved in the scheme (including the trustees and the scheme funder) are fit and proper persons
- the scheme is financially sustainable
- each scheme funder meets specified requirements
- the systems and processes used in running the scheme are sufficient to ensure that it is run effectively, and
- the scheme has an adequate continuity strategy.
In order to be satisfied that a scheme is financially sustainable, the Regulator must be satisfied that:
- the business strategy relating to the scheme is sound, and
- the scheme has sufficient financial resources to meet both the costs of setting up and running the scheme as well as the costs of transferring members to another master trust and winding-up the scheme should that be necessary.
As well as introducing a requirement for master trusts to obtain authorisation, the Bill will also introduce a formal ongoing supervision regime under which:
- trustees will be required to submit the scheme’s accounts to the Regulator each year and submit a supervisory return on request, and
- trustees and other persons involved in the operation of the master trust will be required to notify the Regulator following the occurrence of significant events, which will be set out in regulations.
The Regulator will be required to publish a list of authorised master trusts and it will have the power to withdraw a scheme’s authorisation at any time.
Discontinuance of a master trust
In the event that the Regulator withdraws a master trust’s authorisation, the trustees will be required to make arrangements to transfer members’ funds to another master trust. Should this be necessary, the Bill will prevent the trustees from increasing charges on members to cover the costs of taking such action. This means that master trusts will be required to have alternative sources of funds available to cover these costs.
The Bill also sets out certain other trigger events that may lead to members’ funds being transferred to another master trust and the scheme being wound up, if the situation cannot be resolved to the satisfaction of the Regulator within a limited time period (which is to be prescribed by regulations). These events include:
- an insolvency event occurring in relation to a scheme funder
- a scheme funder deciding to end the relationship with the master trust, or
- the trustees deciding that the master trust is at risk of failure.
Will this apply to existing master trusts?
The Bill provides for the new authorisation and supervision regime to apply to existing master trusts. However, existing master trusts will be given six months from the date on which the requirement to be authorised comes into force to apply for authorisation.
In advance of this, trustees of existing master trusts are required to notify the Regulator should a trigger event occur on or after 20 October 2016. In addition, the Bill makes each scheme funder liable to cover the costs of transferring members to another master trust and winding up the scheme should a trigger event occur on or after 20 October 2016 in respect of an existing master trust that has not been authorised when the event occurs. It is unclear how these requirements are intended to operate in the period between 20 October 2016 and the date on which the Bill comes into force.
The consequences of a disorderly failure of an auto-enrolment master trust would be detrimental for the members concerned and risk undermining confidence in pension saving and auto-enrolment. Therefore, we welcome the fact that the Government is taking action to introduce a more robust regime for the regulation of master trusts.
The statutory definition of a “master trust” is new and it differs from the definition of “relevant multi-employer scheme” used in the charges and governance regulations, which was introduced last year. In its current form, this new definition appears to be wide enough to bring industry wide pension schemes and defined benefit master trusts that provide any money purchase benefits, such as money purchase AVCs, within the scope of this new regime. It is unclear whether or not this is the intention.
A key test for this new regime will be how it impacts existing master trusts, as there is a risk that it could precipitate the very thing that it is designed to avoid. The Regulator and the wider industry will have a key role to play in ensuring a smooth transition. With that in mind, the Government ought, in our view, to go further in the Bill to make it easier for sustainable master trusts to agree to accept members from a failing master trust – for example by providing a statutory discharge for receiving master trusts from liabilities arising from the actions of the transferring scheme. Without this, receiving master trusts, which are effectively being asked to perform a service to the transferring members and the industry, risk being “on the hook” for matters for which they were not responsible. There is also a need for a more efficient bulk transfer regime to be introduced to cater for this scenario and enable member accounts to be transferred on a “non-consent” basis.
The Bill will place new requirements on “scheme funders” that stand behind a master trust, including a requirement for all scheme funders to only carry out activities that relate directly to the master trust scheme. Once again, the purpose behind this restriction is unclear and it risks reducing the protection afforded to master trusts that are currently backed by an entity that carries on multiple lines of business (which provides added protection through diversification).
Finally, as well as introducing a new regulatory regime for master trusts, the Bill is also expected to introduce legislation to cap exit charges. Measures may also be introduced as the Bill goes through Parliament to strengthen the regulatory regime for defined benefit pensions in response to the debate currently taking place on this.