Details of master trust 'authorisation and supervision' regime set out in draft regulations

Out-Law News | 01 Dec 2017 | 2:34 pm | 3 min. read

Multi-employer 'master trust' pension arrangements will face stricter authorisation and supervision, in line with that imposed by the Financial Conduct Authority (FCA) on contract-based schemes, the UK government has confirmed.

Master trusts will have to meet five criteria, assessed by The Pensions Regulator (TPR), in order to be granted authorisation to operate, according to draft regulations published by the government. The regime will apply to both new and existing master trusts, which will be required to wind up and transfer their members to another scheme if they cannot demonstrate that they meet the criteria.

Authorisation will be subject to a one-off fee, although schemes will be assessed on an ongoing basis, according to the government's consultation, which closes on 12 January. The final fees are yet to be agreed, although new trusts can expect to pay "no more than £24,000" and existing trusts "no more than £67,000", with the higher fees reflecting the additional work assessing an existing trust against the criteria is expected to involve.

Pensions expert Mark Baker of Pinsent Masons, the law firm behind Out-Law.com, said that the planned regime was "new territory" for TPR, bringing it closer to FCA-style regulation which is "hard-hitting when something goes wrong".

"It will take a lot of work for TPR to get to know the providers and trusts it is supervising," he said. "It is essential that the regulator maintains its good progress over the next few months."

"Most of the detail of the new regime will follow next year, including detail about how much information trusts will have to provide to the regulator, systems and processes requirements, and exactly what should be in the business plan and continuity strategy. It's essential that we have certainty on these details in the first few months of 2018, so providers can give employers and members confidence that they are compliant well before the deadline," he said.

Baker said that master trusts could hold £300 billion of pension savings by the middle of the next decade, according to some projections.

"It's essential that the DWP gets this regime right," he said.

Master trusts enable pension scheme providers to manage a defined contribution (DC) scheme for several employers under a single trust arrangement, making them particularly attractive for smaller businesses which are now legally required to automatically enrol their workforce into a suitable pension scheme. There are currently around seven million members of master trust schemes in the UK, with a combined £10bn worth of assets invested.

The government legislated for the creation of a regulatory regime for master trusts as part of the 2017 Pension Scheme Act. The idea is to create a level playing field between master trusts, which are overseen by TPR, and contract-based group personal pension schemes, which are regulated by the FCA.

Master trusts will be assessed under five tough new criteria once the new regime comes into force, which is expected in October 2018. The scheme must be assessed as 'financially sustainable', have sufficient administrative and governance arrangements in place, and have an "adequate continuity strategy" in place should it get into financial difficulties. Persons involved in the scheme must also be assessed as being 'fit and proper'. Scheme funders must be able to present a business strategy and full, audited accounts, in order to provide assurance about their financial situation.

The new regime will be overseen by TPR, which will be given tougher ongoing powers that will allow it to work with and, if necessary, de-authorise master trusts that are at risk of failing. Master trusts will also be required to demonstrate that they continue to meet the authorisation criteria on an ongoing basis, including being able to show that member funds would be protected in the event of a scheme needing to be would up.

Schemes offering both DC and defined benefit (DB) benefits will be covered by the new regime in respect of the DC benefits that they offer if they otherwise meet the master trust definition, subject to a few exceptions. Where schemes offering both DC and DB benefits are caught, the scheme funder requirements will be disapplied if the only scheme funders are the participating employers. Small self-administered schemes will be exempt as long as the members make up the majority of trustees, and single member schemes will also be exempt.