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Master Trust regulation

Published Tuesday, September 11, 2018

Looks at provisions to regulate Master Trusts (a kind of pension scheme used by many employers for auto-enrolment) to be introduced under the Pension Schemes Act 2017.

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Master Trusts are trust-based occupational pension schemes which seek to generate economies of scale by serving multiple employers, who may be entirely unrelated. Whereas traditional trust-based schemes are set up a by a single employer with an interest in it, Master Trusts are set up by a product provider, who installs a group of trustees to run it. The provider also supplies administration and investment services to the trustees. Employers can use Master Trusts to provide pensions for their workers, rather than setting up their own or using a Group Personal Pension (regulated by the Financial Conduct Authority).

In January 2017, there were 7.1m members and £10bn assets in 87 Master Trusts. This grew from 0.2 million members in 2010 as a result of requirements on employers to auto-enrol workers into workplace pensions, and is forecast to grow further. (Master Trust Impact Assessment, October 2017). Over half (59%) of individuals auto-enrolled by March 2017, had been enrolled into a Master Trust (PPI, The Future Book 2016, chart 4).

In May 2016, the Work and Pensions Select Committee described Master Trusts as a “good fit” with auto-enrolment because they provide the “ongoing oversight of investments provided by a trustee board at lower operating costs than single employer schemes, through economies of scale from pooling administrative functions”. However, it supported the Minister’s call for a Pensions Bill to introduce stronger regulation of Master Trusts. It recommended that a Bill should make provision for the Pensions Regulator to have power to enforce: minimum financial and governance standards for market entry; ongoing requirements for Master Trust schemes, which might include making compliance with the Master Trust assurance framework mandatory; and measures to protect member assets in the event of a Master Trust winding up. (HC Deb 579, March 2016).

A consensus developed that the regulatory framework for trust-based occupational pension schemes was inadequate for Master Trusts because:

  • It had developed with single-employer schemes in mind and assumes an employer having an ongoing interest in the running of the scheme.
  • Many Master Trusts were set up to make a profit, which gave rise to the need for a different type of regulation to ensure member benefits are protected.
  • Master Trusts operate on a scale unprecedented in occupational pensions and the collapse of a large scheme has potential to create a greater shock than would be the case with a single employer scheme (Impact Assessment, para 15-19).

The Master Trust Assurance Framework developed by the Pensions Regulator (TPR) and the Institute of Chartered Accountants in England and Wales addressed some issues but was voluntary and did not address risks relating to financial stability and ensuring the provider holds sufficient capital in reserve.

Under the regulatory framework put in place by the Pension Schemes Act 2017 the Pensions Regulator (TPR) will be responsible for authorising and supervising master trusts against criteria relating to systems and processes, financial sustainability and that people running the schemes are fit and proper. Authorisation is expected to start from October 2018. However, to protect members of existing schemes, some provisions took effect from the time the legislation was introduced to Parliament (HC Deb 30 Jan 2017 c756). TPR explains what schemes need to do in the meantime:

If you are involved with a master trust you have duties to report certain ‘triggering events’ to us. These events may indicate that the scheme cannot continue to operate. You also cannot increase charges to members during a triggering event period. Read more about these triggering event duties.

You should continue to comply with the standards set out in our DC code.

We also expect you to obtain master trust assurance to help you show that you have governance and administration standards that meet the DC code.

The details of the authorisation and supervision regime for Master Trusts are in the Occupational Pension Schemes (Master Trusts) Regulations 2018 (SI 2018 No. 983). In debate in Parliament, Baroness Buscombe explained:

From 1 October, both existing and new master trust pension schemes will be required to be authorised by the Pensions Regulator and will be subject to ongoing supervision by the regulator to ensure that they are maintaining the standards required at authorisation. Any scheme that opts out of applying for authorisation, or which fails to meet the required standards upon application, will be required to wind up and transfer its members to an authorised scheme (HL Deb 18 July 2018 c101GC)

She said the Government had always been clear that a significant number of schemes are unlikely to meet these standards and will need to leave the market. TPR was working closely with 20 schemes that had already closed or signalled their intention to wind up, including by helping them find appropriate destinations for their members. (Ibid c102).

 

Commons Briefing papers CBP-7758

Author: Djuna Thurley

Topic: Pensions

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