The Government is introducing legislation in the Pension Schemes Bill to protect people saving for retirement through master trusts. This follows industry concerns on the risks to members of a master trust failing. In this article, we consider the changes being introduced, why they are needed and their likely effect.
What are the changes?
The Pension Schemes Bill sets out five criteria that master trusts will have to meet:
1. The people involved in the scheme must be fit and proper
Concerns have been raised by many people that some smaller master trusts ‘may not be run by competent people’. This potentially puts members’ savings in these master trusts at greater risk. The bill aims to address this by placing a duty on The Pensions Regulator to approve each person involved in the master trust as fit and proper. This would put master trusts on a similar footing to contract-based arrangements where the focus is on individual accountability.
2. The scheme is financially sustainable
Many master trusts are too small to be financially viable. The bill will require master trusts to demonstrate they are financially sustainable and have sufficient resources to cover their costs. Members need confidence the master trusts into which they are saving will still be around when they come to take their savings. Providers of contract-based arrangements already have to comply with the FCA/PRA capital adequacy rules.
3. The scheme funder must be a separate legal entity and provide assurances about its financial position
Activities will be restricted to those directly related to the scheme and will provide certain financial assurances. This will provide members with greater protection as the resources and finances of the entity can’t be diverted for other business purposes of the scheme funder.
4. The scheme must have adequate systems and processes in place to ensure that it is run effectively
Governance and administration lie at the heart of delivering good member outcomes. Although most master trusts are well run, those that are not may be placing members’ savings at risk. The bill will require master trusts to put effective systems and controls in place to prevent this from happening. These are standard in contract-based arrangements.
5. The scheme has an adequate continuity strategy
Members should not be left to pick up the costs of a failing master trust. The bill will require master trusts to have a continuity strategy detailing how members’ interests are protected in the event of a trigger incident (e.g. the scheme funder decides to withdraw from the scheme). Such costs should therefore not fall on members. On contract-based arrangements, members’ interests are protected on the failing of a provider through the Financial Services Compensation Scheme (FSCS).
The bill also gives The Pensions Regulator new powers to intervene where a master trust risks failing to meet these criteria.
Why are these changes needed?
The Pension Schemes Bill intends to address the fact that master trusts have traditionally been subject to a lighter-touch regulatory regime than contract-based arrangements such as group personal pensions, which are regulated by the FCA. It aims to drive up the standards of master trusts by requiring them to meet higher operating criteria.
Automatic enrolment is bringing large numbers of people into saving for retirement for the first time. These individuals need reassurance that the master trust into which they are saving is run by fit and proper people and their savings are being properly managed.
These changes will increase the standards applying to master trusts and bring them more in line with those already applying to contract-based arrangements.
What is the likely effect of the changes?
Many people predict there will be significant master trust consolidation following the new authorisation criteria that master trusts will need to meet. According to The Pensions Regulator, there are over 70 master trusts and this number is expected to reduce substantially.
Consolidation will be a good outcome if it results in fewer, larger-scale, more secure and better-run master trusts. Members of these master trusts can have greater confidence their savings are safe with less risk of the master trust failing.
These changes should help to make master trusts stronger, more durable and better placed to deliver good member outcomes. Contract-based arrangements don’t have similar issues to master trusts as they are already compliant with these changes.
Source: Pension Schemes Bill