Pensions insight
Stuart Earle, pension partner at Eversheds LLP , discusses impending legislation Regulation of master trusts
A s expected, the government laid the Pension Schemes Bill before parliament in October. To address concerns about the sustainability of some defined contribution (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. Following the introduction of automatic enrolment (AE) in 2012, there has been significant growth in the number of master trusts participating in the United Kingdom’s pensions market. According to figures published by The Pensions Regulator, over half of employers have chosen to use a master trust as the AE vehicle for some or all of their staff. This means that master trusts are being used by tens of thousands of employers to deliver DC pensions to millions of individuals. The Bill sets out a new authorisation and supervision regime for master trusts which: ● provide money purchase benefits ● are used by two or more employers ● are not used only by employers which are connected with each other, and ● are not public service pension schemes. Under this new regime a master trust will need to be authorised by The Pensions Regulator to operate. To obtain authorisation, the trustees will need to apply to and satisfy The Pensions Regulator that: ● the persons involved in the scheme (including the trustees and the scheme funder) are fit and proper persons ● the scheme is financially sustainable ● the systems and processes used in running the scheme are sufficient to ensure it is run effectively, and ● the scheme has an adequate continuity
strategy. To be satisfied that a scheme is financially sustainable, The Pensions Regulator must be satisfied that: ● the business strategy relating to the scheme is sound, and ● the scheme has sufficient financial resources to meet 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. ...taking action to introduce a more robust regime... The Bill will introduce a formal ongoing supervision regime under which trustees must submit scheme accounts to The Pensions Regulator annually and submit a supervisory return on request. Trustees will also be required to notify The Pensions Regulator following the occurrence of significant events (to be confirmed by regulations). The Pensions Regulator will be required to publish a list of authorised master trusts and will have the power to withdraw authorisation at any time. If The Pensions Regulator withdraws authorisation, the trustees must make arrangements to transfer members’ funds to another master trust. In such case, trustees will be prevented from increasing member charges to cover the costs of such action. This means master trusts will be required to have alternative sources of funds available. 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 Pensions Regulator within a limited time period (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. 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. Comment The consequences of a disorderly failure of an AE master trust would be detrimental for the members concerned and risk undermining confidence in pension saving and AE. Therefore, it is positive that the government is taking action to introduce a more robust regime for master trust regulation. The statutory definition of a ‘master trust’ 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 additional voluntary contributions, 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 Pensions Regulator and the wider industry will have a key role to play in ensuring a smooth transition. n
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Issue 26 | December 2016/January 2017
| Professional in Payroll, Pensions and Reward |
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