Master trusts – important new operational requirements

What are master trusts?

Since pensions auto-enrolment was introduced in October 2012, the number of “master trusts” operating in the UK has grown significantly to around 90, with over 7 million members and assets of £10 billion under management.  In basic terms, a master trust is a type of pension scheme established under trust but which is intended to be used by employers who are not connected to each other.  The model offers the advantages and scale of a trust based arrangement without the time, expense and risks of an employer operating its own occupational pension scheme.  

New authorisation and supervision requirements

However, there has been a recognition within the pensions industry that service levels from a number of new providers have not been up to scratch and, in particular, that the level of regulation and protection offered to members has fallen short of that provided in a traditional trust based pension scheme.  As a result, the government has outlined proposals in the Pension Schemes Act 2017 for a new system to regulate master trusts in the UK from next year.  This will consist of new authorisation and supervision requirements, meaning that a master trust will only be allowed to operate if it has prior authorisation from the Pensions Regulator (“tPR”), and once authorised, will also be subject to ongoing supervision from tPR. 

Civil penalties will apply to anyone found to be operating a master trust without authorisation, with tPR also having the power to put Trustees on notice of a “triggering event” in relation to the scheme – effectively compelling the Trustees to action a continuity plan which is designed to ensure that the scheme will continue to be operated properly and members’ interests protected until such time as the breach is rectified.  tPR will also have the power to issue a “pause order”, requiring a scheme to stop accepting new members, making payments, accepting contributions or discharging benefits for a period of up to three months to allow any breach to be remedied.   

Much of the detail around the new authorisation and supervision requirements will follow in secondary legislation. However, at a high level the Pension Schemes Act provides that in order to be authorised, a master trust will need to satisfy the following five authorisation criteria:

• Fit and proper persons test - that in the opinion of tPR, the persons involved in running the scheme, including the Trustees, the scheme funder and anyone who promotes or markets a master trust is a fit and proper person.  
• Financial sustainability – this covers two limbs.  First, a requirement for tPR to be satisfied that the scheme’s business strategy is sound (which will also require the submission of a business plan), and second, that the scheme has sufficient financial resources to meet the set-up and running costs.  Importantly, this can require the provision of accounts and any other information required by tPR around assets, capital or liquidity to provide comfort that the scheme is sustainable. 
• Scheme continuity – the provision of a scheme continuity plan that shows how the scheme would be operated and how interests of members would be protected following a triggering event, in particular as regards the level of charges which would be levied on members.
• Scheme funders – the legislation requires a master trust to have in place a “scheme funder”, who is responsible for providing funding in the event of any shortfall, or who is entitled to any profits from the scheme.  Importantly, in order to be authorised, the scheme funder must be a body corporate or partnership whose only activities relate directly to the master trust in question.
• Systems and processes  - tPR must be satisfied that the systems and processes used for running the scheme are “sufficient” to ensure it is run effectively, including the features and functionality of its IT systems and all related records, risk management, and internal process matters.  

Timing

The new requirements are expected to come into force from April 2018, with a compliance deadline of October 2018. However, schemes should of course start to plan at an early stage, and there are already transitional arrangements in force for master trusts currently in operation, which will protect members before the new regime comes into force next year.  Amongst other things, these arrangements require Trustees to provide the tPR with notice of triggering events and statements of administration charges and impose liability on scheme funders for winding ups triggered after October 2016.