The DWP has issued a consultation document on Regulations introducing an authorisation and a supervisory regime in relation to Master Trusts.
A Master Trust is a type of occupational pension scheme used by more than one employer providing money purchase benefits (either alone or with other benefits) but where the employers are not connected.
Following the introduction of auto enrolment there has been a huge increase in Master Trust membership. This has arisen from around 0.2 million in 2010 to 7.1 million in 2016. The Pensions Regulator among others have raised concerns around the governance of Master Trusts particularly smaller Master Trusts and this saw the introduction of the Master Trust assurance framework in 2014. The aim behind introducing the authorisation and supervisory regime is as follows:
- so that members of Master Trusts have equivalent protection to other types of pension scheme;
- so that the risks specific to Master Trusts are proportionally and proactively regulated;
- to strike a balance between preventing risks occurring and giving the Pensions Regulator power to intervene.
Under the proposed regulations, Master Trusts will be required to meet the following criteria:
- persons involved in the scheme are fit and proper;
- the scheme is financially sustainable;
- each scheme funder meets specific requirements;
- systems and processes are used in running the scheme are sufficient to ensure that it is run efficiently;
- the scheme has adequate continuity strategy.
The Pension Schemes Act 2017 says that employers are connected if they are or they have been part of a group undertaking as defined in Section 1161(5) of the Companies Act 2006. Draft regulations also set out other ways in which employers may be considered as connected. This includes the situation where an employer participates in a Pension Scheme for a temporary period following a corporate transaction. The consultation document confirms that industry wide and not profit schemes would still be caught within the definition of Master Trust.
Existing Trusts must apply to the Pensions Regulator for authorisation from October 2018. If the existing Scheme does not apply or authorisation is declined then the Scheme must wind up and exit the market. Once Schemes are authorised the Pensions Regulator will maintain a supervisory role to ensure that the Scheme continues to meet the authorisation criteria. Schemes established after October 2018 must apply and be authorised before they can operate.
There will be an application fee for authorisation. This is intended to be a flat fee for new schemes. It will be no more than £24,000 and for transitional schemes it will be no more than £67,000. The exact amount is to be determined but there is already concern that this will price existing smaller Master Trusts out of the market.
Mastertrusts will be required to meet the following conditions:
- Persons involved in the Scheme are "fit and proper"
- The fit and proper requirements build on existing regulatory requirements which apply, for example, the requirements around Trustee knowledge and understanding, FCA rules and also money purchase government requirements including the requirements to obtain a share statement.
- The draft regulations create three tests: Integrity, Conduct, Competency.
- Financial Sustainability
- The scheme must be 'financially sustainable'. This will mean that the Pensions Regulator must be satisfied that the Scheme has a sound business strategy and that the Scheme has sufficient financial resources to meet the costs of setting up and running a master trust and the cost of resolving an event which have a significant impact on the master-trust's ability to operate (known as a triggering event) which could include the associated cost of winding up the scheme.
- The scheme strategist (the person responsible for making business decisions in relation to the Scheme) will be required to submit a business plan to the Pensions Regulator.
- Scheme funder requirements
- The Scheme Funder is the person responsible for funding the Master Trusts where administration charges are not enough to cover costs or someone who can receive a profit where the income from the Master Trust exceeds the expenditure. There is no expressed legal requirement to have a Scheme funder but it is likely that in most Master Trusts there will be such a person. Where there is a Scheme funder, certain requirements around the legal status of the funder and the activities it carries out will need to be met.
- System and processes
- The Pensions Regulator must be satisfied that systems and processes used in running the Scheme are sufficient.
- Satisfaction of the existing master trust assurance framework will not automatically mean that a scheme will then meet all the new regulatory requirements. It may mean that a lot of the information will already have been collated.
- Continuity Strategy
- Master Trusts are required to have a strategy prepared by the scheme strategist which sets out how members will be protected if a triggering event occurs. This also governs the administration charges which would apply in such a scenario. Once a trigger event has occurred the Master Trust must submit a statement of charges and must not introduce new charges or increase any charges unless and until the trigger event is resolved.
In terms of control and ongoing monitoring the Pensions Regulator will have a supervisory function. The Pensions Regulator will be consulting on its code of Practice and will publish operational guidance applicable to Master Trusts.
Additionally, a supervisory return will need to be submitted to the Pensions Regulator and significant events affecting the Master Trust will also be notified to the Pensions Regulator.
The consultation will run until 12 January 2018.