Pensions Regulator to get powers to authorise and de-authorise master trusts

Out-Law News | 21 Oct 2016 | 10:26 am | 3 min. read

The Pensions Regulator is to be given new powers to authorise and de-authorise multi-employer 'master trust' pension schemes as part of new legislation published by the UK government.

However, the Pension Schemes Bill does not propose a formal capital adequacy framework for these schemes, instead introducing new requirements that a master trust be "financially sustainable" and have an adequate continuity strategy in place in the event of scheme failure. Further details will be set out in regulations, the government has said.

Pensions experts at Pinsent Masons, the law firm behind, broadly welcomed the legislation, which will now be debated in the houses of parliament. In particular, they welcomed the fact that the new requirements would not prove particularly burdensome for well-run master trusts, including those that already comply with the voluntary assurance framework.

"Most members are in sustainable master trusts, and so the bill looks to avoid too much extra bureaucracy for those who will clearly pass the tests," said Tom Barton. "Those who are underway with the assurance framework will not find it too hard – but there will be work to be done in refining business continuity plans and setting up a suitable financial buffer to guard against adverse events."

"It is probably best that the policymakers have steered away from something along the lines of the SIPP capital adequacy regime, since this may well have been more complicated to implement than was strictly necessary in the circumstances," he said.

Master trusts, which enable pension scheme providers to manage a defined contribution (DC) scheme for several employers under a single trust arrangement, have become increasingly popular over the past couple of years due to the success of the government's automatic enrolment workplace pension programme. Smaller employers, which are now legally required to automatically enrol their workforce into a suitable workplace pension scheme but which do not necessarily have the resources to operate a pension scheme of their own, may look to a master trust to manage their pension arrangements.

However, master trust arrangements have traditionally been subject to a lighter touch regulatory regime than contract-based group personal pension schemes (GPPs), which are regulated by the Financial Conduct Authority (FCA). Master trusts can obtain independent assurance of their quality, measured against a voluntary assurance framework developed by the Institute of Chartered Accountants of England and Wales.

The Pension Schemes Bill will introduce tough new criteria that master trusts will be expected to meet if passed in its current form. It would introduce a new 'fit and proper' test for persons involved in the new scheme, require the scheme to be financially sustainable and to have an "adequate continuity strategy" in place should the scheme get into financial difficulties. New rules will be introduced for scheme funders, requiring them to be able to provide assurances about their financial situation; and new "systems and processes requirements" relating to scheme governance and administration will also be introduced.

Legislation to introduce the planned cap on early exit charges for members of occupational pension schemes seeking to take advantage of the pension freedoms has also been included in the bill. The FCA has already announced its intention to cap early exit charges on contract-based schemes at 1% of the total value of the pension pot, and to ban such charges outright on any personal pension contracts entered into after the new rules come into force.

Pensions expert Mark Baker of Pinsent Masons said that the criteria set out in the legislation "start to make the assurance framework look mandatory", particularly that in relation to systems and processes, and business continuity.

"The authorisation process is an interesting step," he said. "Clearly the regulator is looking to make sure that the business behind the master trust is in the right shape. The majority of genuine auto-enrolment master trusts should not be too challenged by this – it sounds as though much of what is already covered by the Master Trust Assurance Framework will help to give the regulator what it needs."

"We now have some key roles defined in relation to master trusts: scheme strategist being the commercial decision-makers behind the master trust; scheme funder being the party that foots the bill if the running costs exceed the income. Each party is allocated responsibilities to go with the role. Putting a financial buffer in place to make sure the scheme can carry on for at least six months in the event of failure will protect member money," he said.