The 2016 Pension Schemes Bill was published on 21 October 2016. Assuming it passes as an Act, this will enable detailed regulations to be drafted by the Department for Work and Pensions.
As expected, even without the detailed regulations, it is clear it is going to be much harder for master trusts to be set up and run than it has been in the past.
Given the proliferation of master trusts this can only be a good thing in general, even if there are some question marks over the application of individual clauses within the Bill, and so uncertainties about what this means for both sponsoring employers and members.
In this article I look at what the requirements of the new Bill are and consider what it means for the industry, as well as sponsoring companies with employees in a master trust arrangement.
What is a master trust?
A ‘master trust scheme’ is defined in the Bill as an occupational pension scheme which:
a) provides money purchase benefits (whether alone or in conjunction with other benefits);
b) is used, or intended to be used, by two or more employers;
c) is not used, or intended to be used, only by employers which are connected with each other; and
d) is not a relevant public service pension scheme.
The definition is worded in a way that is designed not to include multi-employer defined benefit pension arrangements, such as industry-wide pension schemes. However, some of these will be caught because they also have defined contribution sections.
Although not master trusts as we normally think of them, they are typically schemes for groups of employers in the not-for-profit sector where the original scheme was DB in nature and DC sections have been added over time.
Including such schemes in the master trust legislation is like taking a sledgehammer to crack a nut. Although there may be some flexibility in the detailed regulations to follow, it looks as though they will be onerous, complex and expensive to comply with.
According to the Pensions Regulator there are now more than 100 pension schemes that have self-identified as master trusts. Based on experience in Australia, it is generally accepted that the market will not support more than six to 12 master trusts in the long term and that many of these 100 are running under shaky business plans.
The biggest concern is that there will be a series of failures and consequent uncontrolled scheme closures. Apart from the obvious impact on employers and individual members, this potential for shambles could bring the entire pension industry into disrepute.
There will be five key criteria for authorisation:
1) Fit and proper persons requirement
Self-evidently, this is to minimise both the number and impact of pension scams. One way to do this is to keep the bad guys out of the business. These requirements are extensive covering: trustees; anyone who can appoint trustees or vary the powers of the trust; and those who establish or fund the trust. They all need to be fit and proper, defined in the Bill as an occupational pension scheme which:
2) Financial sustainability requirement and business plan
To be authorised, a master trust will need to have a sustainable business plan. In its most recent report (30 September 2016) TPR tells us 6.7m members have now been auto-enrolled to DC arrangements to add to the 9.7m who were already a member of a qualifying scheme on their staging date.
There are a further 6m workers yet to be assessed when their employers reach staging dates. But let us do the maths: Nest tells us that it has more than 4m members in its master trust, The People’s Pension has more than 2m, L&G has more than 2m and NOW Pensions has 1m. That adds up to 9m auto-enrolees, which is already in excess of 6.7m. This is before adding in another 96 master trust arrangements and group personal pensions.
Part of the mismatch stems from unreliable statistics, but a large part is due to employee mobility. At the larger master trusts there are some members who are already on their third, fourth and more auto-enrolments since 2012, having changed jobs.
Small pots are uneconomic for two important reasons:
1. TPR’s general levy of a minimum of 83p per member per year – which applies to deferred members with small pots (often under £100) as well as active members – this can get expensive very quickly.
2. These small deferred pots are dispersed among all the providers – some (for example, Nest) keep members’ assets in one account no matter how many times they are auto-enrolled. That helps, but does not avoid proliferation of members in different master trusts.
It will be interesting to see how providers justify a sustainable business plan, given the competition for members and assets under management in the market.
3) Scheme funder requirements
Scheme funders, that is those that provide the underlying financing for establishing and running a master trust until it becomes self-sufficient, must themselves meet the relevant requirements (financial stability etc.) for authorisation.
4) Systems and processes requirements
There is a requirement to have good records and risk management. This also covers resource planning, all ‘administration’ processes as well as strategic definitions and responsibilities. Many of these areas are covered under the existing, but voluntary, Mastertrust Assurance Framework.
Given the focus TPR has had on quality of systems and processes – and the numerous failures of these at providers in the past couple of years – it seems unlikely that the requirements will be any less onerous than under MAF.
So whether or not a master trust embraces MAF on a voluntary basis is likely to be irrelevant once the regulations are in place. It seems likely that if you have not brought in an independent auditor (a MAF requirement) to check your processes, TPR will simply appoint its own (who may be substantially more costly).
5) Continuity strategy requirement
A crucial risk that TPR is concerned about is whether members would need to pay the costs of closure and transfer following the failure of a master trust. That failure might be of the business plan or another ‘triggering event’ such as TPR requiring closure because of failure to comply with all the requirements discussed above.
In either case, the continuity strategy is a document addressing how the interests of members of the scheme are to be protected if a triggering event occurs. This must include a section on charge levels payable by members.
How will this affect the DC market?
There is a balance to be struck between protecting members’ assets and minimising the costs that those same members must bear to meet the governance requirements. Overall, and subject to the detailed regulations, it looks like the government has allowed TPR powers to do their job effectively without over-engineering the solution at excessive cost.
It is too soon to be sure how this will affect the market, if only because of external factors – Brexit, potential reviews of pension tax, the advent of Lifetime Isa (and, potentially, Pensions-Isa).
Having said that it seems likely that, within five years, the number of master trusts will fall from about 100 to between 20 and 30 at most (of which the largest few will manage the majority of members and assets).
What action should be taken?
If you are advising an employer on choosing a master trust, do so very carefully in the current environment. If you currently run a sub-scale master trust and/or do not have robust processes and a credible business plan, then you are unlikely to be in business much longer – The Iceman Cometh for you.
Andrew Cheseldine is a partner of LCP
Key points
Following publication of the Pension Schemes Bill it is going to be much harder for master trusts to be set up and run in the future.
There are now more than 100 pension schemes that have self-identified as master trusts.
There is a balance to be struck between protecting members’ assets and minimising the costs that those same members must bear.
