The Pension Schemes Bill 2016/17 (the Bill) has been published and is making its way through Parliament. The Bill will create a new system for the regulation of master trusts, and also has provisions on early exit charges.
What are ‘master trusts’ and when are they used?
Master trusts are multi-employer occupational pension schemes. This means that they are trust-based schemes with a trustee board. However, whereas an employer will usually set up a pension scheme for its own employees, a master trust is usually set up by a provider (for example, an insurance company) and made available to non-associated employers (that is, employers who do not have any connection with each other). Each employer will have their own section or sections within the master trust and decide what benefits they want to offer to their employees.
Master trusts are being widely used for automatic enrolment. They are also being used to help to achieve compliance with DC governance requirements. This has led to a growth in the number of master trusts and the government wishes to ensure that they are properly regulated.
Under the new regime it will not be possible to operate a master trust unless the scheme is authorised. The trustees of a master trust will have to apply to the Pensions Regulator (TPR), which will be policing the new regime, for authorisation. If trustees fail to obtain the necessary authorisation they may be subject to fines by TPR (£5,000 for an individual and £50,000 in any other case).
There will be 5 key authorisation criteria that TPR will consider in determining whether to authorise a master trust:
- Those involved in running the scheme must be “fit and proper persons”.
- The scheme must be financially sustainable.
- The ‘scheme funder’ must meet certain requirements. This is the person who will make profit out of the scheme, and who must provide funds where administration charges from members are insufficient to cover costs of establishing or running scheme.
- The scheme’s systems and processes must satisfy certain requirements. Further details are due to be set out in regulations.
- The scheme must have an adequate continuity strategy in place.
The scheme will need to have a business plan prepared by the scheme strategist, containing a sound business strategy and approved by each scheme funder, any other scheme strategist and the trustees. The scheme will need sufficient financial resources to meet set-up and running costs, and costs incurred should there be a ‘triggering event’ (see below).
The scheme continuity strategy must address how member interests will be protected if there is a triggering event and set out administration charges applying to members. Further details of the contents of this are to be specified in regulations.
There are transitional provisions for existing master trusts which will need to apply for authorisation within six months of the Bill coming into force if they wish to continue.
The Bill sets out ten triggering events, which are akin to winding-up events – they include TPR withdrawing authorisation and an insolvency event occurring in relation to the scheme funder. When a triggering event occurs there will be a duty on the trustees, scheme funder and strategist to notify TPR and the employers of that event. Specified actions will be required in these circumstances and it will be necessary to submit an implementation strategy to TPR for approval.
Early exit charges
The Bill contains a power to allow regulations to be made to cap early exit charges in occupational DC schemes. The DWP has confirmed that it will set a cap at 1% for existing occupational scheme members and 0% for any new members. The government is expected to draft regulations for consultation in early 2017, with a view to them coming into force in October 2017.
TPR has welcomed the Bill, believing that it will provide consumers and employers with confidence that the master trust market is a safe place to invest their pension contributions.
From a practical perspective, the Bill significantly increases the regulatory requirements on master trusts. Although further detail is awaited, master trusts which are already in existence need to start taking legal and other advice to ensure they will be able to obtain the necessary authorisation from TPR once this legislation comes into force. Trustees who are considering a bulk transfer of existing DC savings to a master trust should also consider taking legal advice on their duties.