The Department for Work and Pensions (DWP) has launched a consultation on the draft regulations and policies for the authorisation process and supervisory regime for master trust pension schemes.
The consultation, which will run until 12 January 2018, is seeking views on proposed draft regulations that will introduce an authorisation and supervision framework for master trust pension schemes under the Pensions Scheme Act 2017. This will mean that master trust pension schemes will be required to apply for and receive authorisation in order to operate.
Under the draft regulations, The Pensions Regulator (TPR) will be responsible for the authorisation and supervision process. TPR will assess potential master trust schemes against set criteria including that the persons involved in the scheme are fit and proper persons, the scheme is financially sustainable, that each scheme funder meets specific requirements, the systems and processes used to run the scheme are sufficient to ensure effective operations, and that the scheme has an adequate continuity strategy.
The draft regulations propose that master trust schemes that do not apply for authorisation or do not meet the authorisation criteria will be required to transfer its members to another pension scheme before winding up the master trust arrangement. Schemes that are at risk of falling below the set standards will be required to address any areas of concern or members will need to be transferred out of the master trust scheme, and the scheme closed.
The suggested draft regulations aim to ensure that members of master trust schemes have equivalent protections to members in other types of pension schemes, and that any risks specifically related to master trust arrangements’ financial resilience and visibility, such as scheme size and scope, lack of employer engagement, and diverse business models, are proportionately and proactively regulated.
TPR will consult on its code of practice and publish operational guidance in the upcoming months in order to clarify what it expects to see from master trust schemes in order to meet and maintain the new authorisation criteria. It will also make clear the expectations on a master trust scheme when it is faced with significant change, or experiences problems that puts members’ interests at risk.
In the Pensions Scheme Act 2017, a master trust scheme is defined as an occupational pension scheme that is used by more than one employer, provides money purchase pensions either alone or with other benefits, and is not a public sector scheme or used only by connected employers.
The draft regulations are expected to come into effect in October 2018.
Guy Opperman MP, minister for pensions and financial inclusions, said: “The authorisation and supervisory regime introduced by the Pension Schemes Act 2017 will ensure that the over seven million people saving for their pensions through master trust schemes will have equivalent protection to members of other pension schemes. The draft regulations detail how the authorisation regime will work and what will be required of master trust schemes. They aim to strike the right balance between safeguarding the savings of the millions of employees using master trust schemes, and the work these schemes must undertake in order to be authorised by the Regulator.”
Nicola Parish, executive director of frontline regulation at TPR, added: “We welcome the publication of the draft regulations for master trust authorisation and I urge trustees and providers to take part in the consultation.
“We have been in active discussions with the industry for more than 12 months and will publish a code of practice for consultation early next year on how authorisation will work and how the criteria should be met. Our goal is to ensure those responsible for running and governing master trusts understand the requirements and are ready to apply for authorisation, which is expected from October 2018.”
David Bird, proposition director at LifeSight, said: “The DWP’s draft regulations for the authorisation of master trusts are to be welcomed. The Regulator says that 80% of members in occupational schemes used for auto-enrolment are in master trusts and so the quality of regulation in this sector of the industry needs to work. The regulator is setting its stall out that the hurdle is high. Those master trusts that intend to obtain authorisation have to apply to the regulator by October 2018. Those that decide the hurdle is too high will have to cease operation within the year.
“In reality this is the consolidation catalyst that the industry has been predicting for some time and we estimate that the number of operating master trusts will quickly reduce from around 70 at the moment to approximately 20 within a year. This consolidation will mean that many master trust members will end up better off in a well-run scheme with superior governance and security.”
Kate Smith, head of pensions at Aegon, added: “In future all master trusts will be authorised by the Pension Regulator and have to submit a business plan proving financial sustainability including evidence they have access to funds to cover trigger events such as wind-up costs. The new regulations will have the dual benefit of driving up standards and offering greater protection to members.
“We’re pleased the government has listened to the pension industry and avoided duplication and over-onerous rules by recognising that master trusts run by [Prudential Regulation Authority] regulated providers already meet high capital adequacy standards.
“Master trusts come in all shapes and sizes. Attracted by automatic-enrolment, and with historically low regulatory entry barriers, the UK has seen a proliferation of master trusts since 2012. In future those without access to additional funds are unlikely to survive. The regulations will increase the cost base of master trusts leading to greater consolidation over the next couple of years. All new master trusts, regardless of their size, will have to pay the Pensions Regulator a flat fee, of not more than £24,000, as part of the authorisation process. The Pensions Regulator expects reviewing existing master trusts to involve substantially more work and their fee could be up to £67,000, almost three times as high. Only the financially stronger schemes are likely to want to continue to participate in this market while weaker master trusts will look to find a buyer.”