The Pension Schemes Bill was introduced into the House of Lords on 19 October 2016. Its main purpose is to regulate master trust schemes and to cap early exit charges in occupational pension schemes providing money purchase benefits.
This article considers the changes which will be brought about by the Bill.
Master trusts: why is regulation needed?
The introduction of automatic enrolment has resulted in a substantial increase in the number of employers needing to ensure that their staff are in a suitable pension scheme. As a result, the use of master trusts has rocketed: as at January 2016, there were 84 master trusts with over 4 million members and £8.5 billion in assets. In broad terms, a master trust is an occupational pension scheme providing money purchase benefits which is intended to be used by two or more unconnected employers.
Master trusts are particularly attractive to employers which have few employees and no existing pension provision. They can save on employer cost and administration time when it comes to setting up a workplace pension.
Until now, master trusts have been largely unregulated, with only a voluntary assurance framework in place which master trusts can use to demonstrate that certain standards are met. Only twelve master trusts have been confirmed by the Pensions Regulator (the Regulator) as meeting the standards set out in the framework - the vast majority of master trusts have not been independently assessed and may be falling short of the standards.
The Bill imposes statutory requirements on master trusts to ensure that members’ benefits are protected and that master trusts are only allowed to operate if they meet those requirements.
Regulation of master trusts under the Bill
The Bill requires a master trust to be authorised - operating an unauthorised master trust can result in a civil penalty. The Regulator will only authorise a master trust if:
- Key persons involved in the scheme are fit and proper – the Regulator must consider the suitability of key persons including the person establishing the master trust, the trustees, the person who can appoint and remove trustees, the person who can amend the scheme documentation, the scheme funder and the scheme strategist
- The scheme is financially sustainable – the Regulator must be satisfied that the scheme has a sound business strategy, and has sufficient financial resources to both set up and run the scheme and to comply with requirements to protect members in the event of scheme closure or winding up. There must be a regularly-reviewed business plan prepared by the scheme strategist and approved by the scheme funder and trustees
- Each scheme funder meets specified requirements – it must be a separate legal entity which only carries out activities that relate directly to the master trust for which it is the scheme funder
- The systems and processes used in running the scheme are sufficient to ensure that it is run effectively – the Bill contains a power to make regulations in relation to the adequacy of a master trust’s systems and processes
- The scheme has an adequate continuity strategy – the scheme strategist must prepare a continuity strategy setting out how members will be protected if a master trust has a “triggering event” (an event which is likely to lead to the scheme failing or losing its authorisation – see below).
The Regulator will have to issue two new codes of practice covering the process for applying for authorisation and the matters which the Regulator must take into account in deciding whether the authorisation criteria are met.
A triggering event includes:
- the Regulator withdrawing its authorisation
- the insolvency of the scheme funder
- the ending of the relationship between the scheme funder and the master trust
- the winding up of the master trust
- a decision by the trustees that the master trust is at risk of failure.
Where there is a triggering event, the trustees and others must notify the Regulator and the employers participating in the scheme, and must take steps to either transfer members’ rights to another scheme or to otherwise address the triggering event.
The trustees must submit an implementation strategy to the Regulator for approval, setting out how members’ interests will be protected. They must also submit periodic reports to the Regulator, cannot accept new employers into the master trust and cannot increase or impose new administration charges.
The Regulator will have the power to restrict other activities – such as accepting new members, making payments, accepting contributions and discharging benefits – once a triggering event has occurred. These restrictions, called “pause orders” can be imposed for up to three months, and can be extended by the Regulator to a maximum of six months.
What about master trusts already in existence?
The Bill sets out transitional provisions for master trusts which were in existence before the Bill comes into force. These require master trusts to submit an authorisation application to the Regulator within six months of the Bill coming into force. In the interim period, master trusts are allowed to continue to operate until they receive authorisation or until the Regulator determines that the master trust should not be authorised – in which case it must wind up.
There are also transitional arrangements in relation to triggering events which occur on or after 20 October 2016, meaning that members of master trusts which are in difficulty will receive an element of retrospective protection for a period before the Bill becomes law.
The Bill also introduces a new power to enable regulations to be made to cap early exit charges in occupational pension schemes providing money purchase benefits. The DWP consulted about this measure earlier this year and has recently issued a further consultation about it. The cap will be broadly the same as the planned cap for personal pension schemes, that is, 1% of funds under management for existing schemes and 0% cap for new arrangements.
The increased regulation of master trusts will be welcomed as a way of providing essential protection for millions of individuals enrolled in master trusts. It will give employers much-needed reassurance that they can offer a master trust to their employees as a safe pensions option.
For those master trusts which have already attained the standards set out in the existing voluntary assurance framework, the adjustments needed are unlikely to pose a significant problem. However, there could be real difficulties for other master trusts and the new requirements may well result in a reduction in the number of master trusts operating.