Part 1 - Master Trusts
Master Trusts are pension schemes, set up by a provider such as an insurance company, for use by multiple, often unrelated, employers which are unrelated.
The use of Master Trusts has grown with the introduction of requirements on employers to automatically enrol their workers into a workplace pension (to 4 million members in September 2016, from 0.2 million members in 2010) and was expected to grow further (DWP Impact Assessment, para 11).
The Work and Pensions Committee said Master Trusts were a “good fit” for auto-enrolment – providing ongoing oversight of investments at lower operating costs than single employer schemes – but stronger regulation was needed (HC 579, March 2016).
A widespread consensus developed that existing regulation was inadequate because:
- It had developed with single-employer schemes in mind and assumed ongoing employer interest in the running of the scheme.
- Many Master Trusts were set up to make a profit, giving rise to the need for a different type of regulation to ensure member benefits were protected.
- Master Trusts operated on a scale unprecedented in occupational pensions and the collapse of a large scheme had potential to create a significant shock (Impact Assessment, para 15-19).
To improve member protection, Pension Schemes Act 2017 provided for:
- An authorisation and supervision regime, requiring Master Trusts to demonstrate to the Pensions Regulator that they met certain key criteria;
- Trustees to be required to take certain actions to protect scheme members in the event of wind-up;
- The Pensions Regulator (TPR) to have greater powers to take action where key criteria were not met.
The Government planned to implement the new regime from October 2018 (HL Deb 19 December 2016, c1489). However, to protect members of existing schemes, some provisions would take effect from October 2016. These related to requirements to notify TPR of key events and constraints on charges to be levied on members in the event of scheme failure (HC Deb 30 January 2017 c756).
Debate in Parliament
Much of the detail was left to regulations, with initial consultation on this planned for autumn 2017 (HL Deb 19 December 2016 c1489; HL Deb 1 November 2016 c561). In response to concerns during the Bill’s proceedings in the Lords, that there would be insufficient opportunity for parliamentary scrutiny, the Government made amendments so that the first regulations made under particular clauses would have to be approved by Parliament before becoming law (DEP 2016-0916).
The House of Lords voted by 209 to 204 to accept an Opposition amendment (overturned in the Commons) that would require the Government to make provision for a “scheme funder of last resort”. This was opposed by the Government on the grounds that that there were provisions in the Bill to protect member benefits and that it did not want to deter other Master Trusts from rescuing a failing scheme (HL Deb 19 December 2016 c1507). However, Labour Peer Baroness Drake said that, in the event of a Master Trust not having the means to finance wind-up, there was “nothing in the Bill to show how a member is protected” and “no answer to the question of who will bear the costs.” (HL Deb 19 December 2016 c1504-9). In the Commons, the Public Bill Committee voted by nine votes to four to remove the clause from the Bill (PBC Deb 7 February 2017 c42). An attempt by the Opposition at Report Stage to reinstate the requirement was defeated by 289 votes to 230 (HC Deb 29 March 2017 c337). The Government maintained that the provision was “simply not required” - the risk of catastrophic failure of a Master Trust was very low. Furthermore, representatives of certain pension funds were “contemplating a system for allocation among themselves of any master trust that was going to wind up if the market did not provide a proper destination” (HL Deb 5 April 2017 c1085).
Other issues of debate included:
- How to ensure member engagement, given that there is an acknowledged ‘principal-agent problem’ with Master Trusts – the employer who chooses the pension scheme has less of an incentive than the member to pick one that will deliver good outcomes and value for money. The Government said regulations would be used to ensure the regulator took account of a scheme’s systems and processes for member communications and engagement in making decisions on applications for authorisation. In the Commons, Alex Cunningham proposed a number of amendments aimed at improving member engagement – including requiring Master Trusts to have member-nominated directors and to hold Annual Member Meetings.
- The requirement for Master Trusts to have a separate scheme funder (i.e. the product provider should only carry out carry out activities relating directly to the Master Trust for which it is scheme funder). The insurance industry argued that this would result in unnecessary cost and duplication because those schemes funded by an FCA-regulated entity, already had to meet robust capital requirements and were able to benefit from economies of scale (with shared staff, systems and premises for multiple business lines). The Government argued that separation was essential to enable the regulator to assess the financial positon of the scheme with certainty. It made amendments in the Commons with the aim of minimising disruption to existing corporate structures and shared service arrangements. The Opposition welcomed this but called for more assurance that companies that were already abiding by FCA regulations would be exempt from the new regime. The Minister said they would be exempt if they met the requirements in regulations, which would be subject to consultation (PBC Deb 7 February 2017 c44-7).
- The impact of a ‘pause order’ (under which TPR can require schemes to pause certain activities following a triggering event) on members’ rights to contributions or to payment of their pension. Peers argued that the pause order should not be able to trump members’ rights to employer contributions and tax relief and that there was a lack of clarity on the potential impact on vulnerable people – who might be dependent on their pension payments. Ministers responded that the purpose of the order was to allow the regulator to go in and make sure the problem was resolved. Amendments by the Opposition and SNP aimed at providing for contributions and payments to continue during a pause order were defeated on division at Commons Committee stage (PBC Deb 9 February 2017 c85).
Part 2 - restriction on charges
Part 2 of the Act provided for regulations to over-ride contractual terms in occupational pension schemes where these conflict with the regulations. The intention is enable the implementation of policies to restrict certain pension scheme charges, i.e:
- A ban on member-borne commission charges (where a charge is passed on to members who are required to pay for advice and services they may not use or benefit from). The Government had already made regulations that from April 2016 prevent providers from imposing commission charges on members under new arrangements. Subject to Parliamentary approval, it intends to make regulations that introduce a ban on member-borne commission payments under existing contracts (DWP, Impact assessment, January 2017).
- A cap on early exit charges (i.e. charges incurred when an individual transfers funds out of their pension or accesses them before a date specified in the scheme rules). In November 2016, the Government announced that it intended to implement legislation to introduce a cap on early exit charges of 1% for existing members of occupational pension schemes and 0% for new members (Ibid).