A new regulatory framework relating to master trusts, intended to strengthen the governance requirements and improve the protection of members' benefits under such arrangements, will come into force later this year. In this article we take a closer look at the detail of the new regime and consider what further developments may follow as the idea of consolidation continues to evolve.
What is a master trust?
Master trusts are occupational trust-based pension schemes which provide benefits to employees of unconnected employers, with an independent trustee board which is responsible for most of the governance of the master trust. Benefits under a master trust may be defined contribution (DC), defined benefit (DB) or a combination.
Many employers use master trusts for the provision of DC benefits, with much of their use being for automatic enrolment purposes. DC master trusts have the advantage of offering an experienced professional trustee board, a hands-off arrangement from the employer's perspective, and economies of scale which are usually expected to reduce operational costs. DC master trusts have to comply with the governance requirements that apply to all DC schemes, and employers can be reassured of a master trust's compliance with these requirements if it has obtained master trust assurance in line with the framework developed by the Institute of Chartered Accountants in England and Wales.
DB master trusts have also been in existence for many years, but their use to date is far more limited. Looking forward, we expect this to change in light of the current pensions climate. In addition to the benefits of DC master trusts, DB master trusts are likely to provide improved member security via better risk management and the use of cost savings for improving the scheme funding level – a key concern for sponsors of DB schemes in the current economic environment.
The new master trust regime
The Pension Schemes Act 2017, and draft regulations which are currently before Parliament, set out a new regime for the regulation of master trusts that provide DC benefits. The regime comes into force on 1 October 2018 and will consist of the following key areas:
- DC master trusts will need to be authorised by the Pensions Regulator (TPR) in order to operate, and will have to close if they are not authorised. TPR can remove its authorisation at any time. There are transitional provisions for master trusts already in existence, with authorisation for existing master trusts likely to be provided in batches after October 2018.
- To obtain authorisation, a master trust must demonstrate to TPR that:
- the trust is financially sustainable, with appropriate systems and processes in place;
- the persons involved in the trust (such as the trustees, the founder (that is, the person who established the master trust and may have provided the initial financial backing for it) and the scheme funders (most commonly this will be the person who is financially supporting the master trust with, where relevant, the expectation of being able to later draw profits)) meet specified requirements; and
- the trust has an adequate continuity strategy.
- A draft code of practice has been published by TPR, covering the process for applying for authorisation and the matters TPR that must take into account in deciding whether the authorisation criteria are met.
- Trustees of master trusts will be required to submit annual accounts to TPR, and the scheme funder will also have to submit its annual accounts.
- Trustees of master trusts will be required to submit supervisory returns to TPR on request. The return will provide information about the master trust's performance, business plan and systems and processes.
- There will be a requirement to report "significant events" to TPR. The requirement will apply to a range of individuals, including the trustees, the scheme funder, the scheme founder and advisers such as the scheme actuary, administrators and legal advisers. Significant events include a change to persons involved with the scheme, significant changes to investment principles and system failures that have a significant adverse impact on the security or quality of data. A list of significant events is set out in the draft regulations.
- More serious events which indicate that the master trust is in financial difficulty or not being properly run will be known as "triggering events". These include: the withdrawal of authorisation; an insolvency event occurring in relation to a scheme funder or it becoming unlikely to continue as a going concern; a scheme funder deciding to end the relationship with the master trust; the commencement of the master trust's winding up; the trustees deciding that the master trust is at risk of failure. There are transitional provisions relating to existing master trusts (so, for example, a master trust awaiting authorisation between 1 October 2018 and the batch authorisation dates will not be penalised for not having authorisation). If a triggering event occurs, it must be notified to TPR and the employers participating in the master trust. The trustees must then either attempt to resolve the triggering event, or arrange for the master trust to be wound up and members' funds to be transferred to another master trust. Existing master trusts are required to notify TPR of triggering events that have occurred on or after 20 October 2016 so as to mitigate the risk of members' benefits being adversely affected by parties taking action to try to avoid the need to secure authorisation from October 2018.
What does the future look like?
There is already a clear move in the pensions landscape in the direction of consolidation in relation to DC schemes, both in the use of master trusts and group personal pensions (GPPs). The new regulatory regime will likely see this trend continue, with the number of DC master trusts expected to reduce once the new authorisation and supervision requirements are in force.
DB schemes appear to be moving in the same direction. Last year, the Pensions and Lifetime Savings Association's DB Taskforce proposed a "superfund" which would allow DB scheme employers to offload their DB liabilities to a commercial vehicle and cease to be linked to the scheme, at a cost lower than the cost of buying out benefits.
The DWP's White Paper, Protecting Defined Benefit Pension Schemes, builds on this, setting out proposals for the future of DB schemes. The White Paper has a number of recommendations for consolidation, including:
- establishing a legislative framework and authorisation regime for commercial consolidation vehicles;
- establishing an accreditation scheme for existing consolidation vehicles; and
- working with TPR to raise awareness of the benefits of consolidation.
The DWP will consult on these proposals during 2018 with a view to implementing the recommendations in due course.
The White Paper proposals suggest that the Government is aware of both the potential benefits and the potential risks of DB consolidation vehicles. The test will be whether it is possible to establish consolidation vehicles which get the benefit/risk balance right.