The regulation of master trusts

From October this year, trustees of master trusts will need to apply to the Pensions Regulator (the Regulator) for authorisation to operate in the pensions market.

The Regulator was given the role of overseeing master trusts under the Pensions Act 2017 due to concerns about the lack of regulation of master trusts and the need to provide greater member protections.

The Regulator has recently launched a consultation on its draft code of practice which sets out the approach that the Regulator proposes to take on the authorisation and supervision of master trusts. The code of practice is currently expected to come into force from 1 October 2018.

Existing master trusts will have six months to apply to the Regulator for authorisation. If a master trust is not granted authorisation or chooses not to apply for authorisation within the required timeframe, it will have to wind up and transfer any members it has. New master trusts will have to be authorised before they begin operating. Once a master trust is authorised, it will need to be able to show that it continues to meet the authorisation criteria. This will be done through “supervisory returns” which must be submitted to the Regulator, normally alongside an annual scheme return.

The Pensions Act 2017 sets out the five criteria that master trusts will need to meet in order to be authorised and the draft code of practice sets out the evidence that the Regulator will expect to see in respect of those criteria.

The five criteria that master trusts must show are as follows:

1. fit and proper persons – individuals involved in the scheme must meet the standard of honesty, integrity and knowledge appropriate for their role;
2. financial sustainability – the Regulator must be satisfied about the scheme’s business strategy and that it has sufficient financial resources to meet certain costs;
3. scheme funder – the scheme must be operated by a scheme funder which is a body corporate or a partnership that only carries out activities relating directly to the master trust;
4. systems and processes – the systems and processes used in running the scheme must be “sufficient to ensure that it is run effectively”; and
5. continuity strategy – a document must be prepared which sets out how members’ interests are to be protected if certain events occur.

The draft code of practice deals with each of these criteria in detail and explains the Regulator’s expectations on each point.

In order to apply for authorisation new master trusts will be required to pay a fee of £23,000 and existing master trusts will be required to pay a fee of £41,000, which reflects the larger volume of work there will be for the Regulator in relation to existing schemes.

The consultation period runs until 8 May 2018 and the Regulator is seeking feedback on the code itself and on what information should be included in the accompanying guidance notes.

Master trusts have played an important role in the auto-enrolment of staff into workplace pension schemes over the last few years and many employers across the country will be using these schemes to comply with their auto-enrolment obligations. Well run master trusts are likely to embrace the opportunity to demonstrate that they comply with the legal requirements but employers should ensure that they monitor their own providers as the authorisation regime comes into force.