Regulating Master Trusts: what next?

The Department for Work and Pensions (DWP) is consulting on draft regulations for the new authorisation and supervisory regime for master trusts. You can read the full draft regulations and consultation here.

The Pension Schemes Act 2017 (PSA 17) has already set out the basic framework, so these regulations are intended to provide further details. But do they achieve their purpose and when will they come into effect?

This might at first sight seem only of interest to master trusts. But as many employers are using a master trust to meet their automatic enrolment obligations (rather than setting up and running their own scheme), they might be comforted to hear that the Regulator will be maintaining and publishing a list of authorised master trusts. This should help employers to provide access to arrangements which aim to deliver as good an outcome as possible for employees.

Key action points to note about master trusts

Background

Auto-enrolment requires employers to automatically enrol eligible workers into a qualifying workplace pension scheme. By 2018, it is estimated 10 million people will have been automatically enrolled, the vast majority, into master trusts.

Master trusts are unique; they are trust based, but also (usually) profit-driven, bridging the divide between personal pension plans and occupational pension schemes. They are also commonly larger than occupational pension schemes, but typically do not face scrutiny from participating employers who are keen to ensure that the scheme is well run. This leaves a gap in the regulatory regime.

The Pensions Schemes Act 2017 (PSA 17) aims to fill that gap, protecting scheme members and instilling quality and public confidence in the market. The PSA 17 introduced a new regime (yet to fully come into force) under which master trusts must first apply for and receive authorisation in order to operate in the market and secondly established a supervisory regime to ensure that these master trusts continue to meet the authorisation criteria. Any master trust which does not conform will have to address any shortcomings or transfer their members to another scheme and wind up.

The goal is to ensure that schemes are fit for purpose, with continuity plans in place for unforeseen events, business plans to keep schemes on track and financially sustainable accounts and goals. The draft master trust regulations provide further detail about how this regime will operate.

The new draft regulations and their interaction with the PSA 2017

The proposals

The PSA 17 provides the basic framework of the new regime but not all of it is in force. The new regulations will, alongside a commencement order, bring the new authorisation and supervision regime into effect from 1 October 2018. The aims of the new regime are to:

1. Achieve equivalent protection across the DC landscape for members of master trusts;
2. Ensure the market evolves in a balanced way - balancing appropriately between member protection and the cost of regulation;
3. Provide an ongoing supervisory role, to reduce the likelihood of member detriment in the future;
4. Put the Regulator into a position where it can proactively ensure schemes are authorised before members join; and
5. Reduce the likelihood of a master trust being set up for fraudulent purposes.

A Code of Practice will also be issued in 2018 by the Regulator, which aims to set out further details on what the Regulator will expect of Master Trusts if they are to meet and maintain the criteria for authorisation. It will also clarify the Regulator's expectations on what Master Trusts should do if they face significant changes or problems.

Obtaining authorisation

It is expected that the requirement to obtain authorisation to operate as a master trust will be in place by 1 October 2018. Once a master trust has been authorised, there will be no requirement to apply for authorisation again.

The Application

To obtain authorisation, a master trust will need to apply to the Regulator, supplying it with:

1. The scheme's latest accounts;
2. The latest accounts of each scheme funder;
3. An application fee of up to £67,000 for existing master trusts and £24,000 for new trusts;
4. The scheme's business plan (setting out prescribed information including the scheme's objectives and its strategy for meeting them);
5. A governance statement;
6. Details of systems and processes (for example details of IT systems, how member records are processed and processes for contracts and service providers);
7. A statement of investment principles; and
8. The scheme's continuity strategy. This will set out how the interest of the members will be protected in the event of a triggering event.

Assessing the application against the criteria

The Regulator will then assess the master trust's application using the following criteria:

• Whether the persons involved in the scheme are fit and proper persons (i,e, whether they fulfil the integrity test, conduct test and competency test);
• Whether the scheme is financially sustainable. This means:
  • The business strategy relating to the scheme is sound; and
  • The scheme has sufficient financial resources to meet the costs of running the scheme and costs of transferring members to another master trust and winding up the scheme, should that be necessary. This will involve considering whether there are sufficient liquid assets to cover any costs.
• Whether each scheme funder meets specified requirements, i.e.:
  • That it has sufficient financial resources to be financially sustainable;
  • That it only provides activities that relate directly to the master trust scheme of which it is the funder (for transparency reasons), unless it submits information setting out why it should be exempted; and
  • That it submits audited accounts annually;
• Whether the systems and processes used in the scheme are sufficient to ensure that it is run effectively; and
• Whether the scheme has an adequate continuity strategy.

Ongoing supervision

Once master trusts have been authorised, they are subject to ongoing supervision.

The authorisation regime requires Trustees to submit their scheme's accounts to the Regulator annually, and that they notify the Regulator following the occurrence of certain triggering events or other significant events. Also, Trustees will be required to submit a supervisory return on request (no more than annually). Schemes should also review their continuity strategy and business plans regularly (at least annually), and if they are revised, provide them to the Regulator within three months.

Triggering events are events which affect the future of the scheme - for example insolvency of a scheme funder, where a scheme funder decides to end the relationship or scheme wind up. Significant events include those where a scheme funder or trustee is convicted of an offence or enters bankruptcy, a significant change to the statement of investment principles and where the scheme is unable or unlikely to meet its liabilities on demand.

Where there is a triggering event, trustees and the scheme funder must keep the Regulator informed and supply formal triggering notices. They must also ensure that members do not suffer through the increase of administration charges during the triggering period.

Which schemes do these requirements cover?

The PSA 17 and regulations apply to master trusts, i.e. "occupational pension scheme(s) used by more than one employer and providing money purchase benefits (either alone or with other benefits) which (are) not public sector schemes or used only by connected employers."

Industry-wide and not-for-profit schemes

Some industry-wide and not-for-profit schemes will have to obtain authorisation. However, certain schemes originally established as DB only, mostly at the privatisation of state-run industries, solely for people employed in the industry at that date with a closed membership and statutory backing, are exempt.

Mixed benefit schemes and certain disapplications

Many mixed benefit schemes will also be subject to the new regime, because the DWP has said that the money purchase element will be liable to grow in scale as time goes on. For these schemes, the authorisation regime will only apply to the money purchase aspects, as protections for DB schemes are already in place.

For mixed benefit multi-employer schemes where the only scheme funders are the participating employers, certain areas of the legislation are disapplied, such as:

• The need for the scheme funder to show that it satisfies the fit and proper and scheme funder criteria;
• The need for the scheme funder to submit scheme funders' accounts; and
• The need for the scheme funder to approve the business plan and continuity strategy and revisions of them.

The DWP recognises that it would be disproportionate for some mixed benefit schemes to be subject to the new regime because the potential for future scale is extremely limited and it is in the interest of members that the money purchase aspect remains intact. The regulations disapply the authorisation regime in the following circumstances:

• Certain industry wide schemes (see above);
• DB schemes only offering money purchase as additional voluntary contributions for their active DB members;
• DB schemes only offering money purchase to active DB members wishing to transfer in their pension rights from other schemes; and
• Small self-administered schemes and single member schemes

There are also provisions for including other pension schemes in the authorisation regime by clustering schemes together with a single controlling party, and where a scheme is set up so that it does not meet the definition of a master trust, but which provides retirement options for members of a master trust scheme with which it shares common rules or is under common control.

Preparing for the legislation - is your house in order?

The DWP expects the new regulations and the remainder of the PSA 17 to be in force by 1 October 2018, meaning that schemes also need to apply for authorisation by then. Although the draft master trust regulations are quite detailed, the finer points about exactly what is needed for authorisation will be supplied by the Code of Practice.

Despite this uncertainty, the draft regulations do broadly provide details about what the business plan, continuity plan and details of systems and processes will need to cover. It might therefore be worthwhile adding this to master trusts' agendas next year to kickstart the process of making sure houses are in order, using the draft regulations as a guide for what ultimately will be required. While some schemes will already have gathered a lot of information under the Master Trust Assurance Framework, not all schemes will be one step ahead.

Next steps of the consultation

The DWP's consultation ends on 12 January 2018 and we will be submitting a response.

You can find the full consultation here.