On 1 October 2018 legislation which regulates UK master trusts is due to come into force. From 1 October, in order to continue operating, a master trust will either:
- need to have obtained master trust authorisation from the Pensions Regulator; or
- in the case of an existing master trust, need to have already applied for authorisation from the Pensions Regulator (schemes which existed prior to 1 October 2018 have a 6 month period in which to apply for authorisation, failing which they will need to close).
The authorisation process is not simple (or cheap) as master trusts must satisfy a number of hurdles in addition to paying an application fee of £41,000.
If you operate a master trust you will need to demonstrate that the scheme meets the required standards across the following criteria:
- Fit and proper: all the people who have a significant role in running the scheme can demonstrate that they meet a standard of honesty, integrity and knowledge appropriate to their role.
- Systems and processes: IT systems enable the scheme to run properly and there are robust processes to administer and govern the scheme.
- Continuity strategy: there is a plan in place to protect members if something happens that may threaten the existence of the scheme, including how a master trust will be wound up.
- Scheme funder: any scheme funder supporting the scheme is a company (or other legal person) and only carries out master trust business.
- Financial sustainability, including business plan: the scheme has the financial resources to cover running costs and also the cost of winding up the scheme if it fails, without impacting on members.
This is all well and good for those schemes set up to be “master trusts”, however, there is a significant risk that:
- some schemes which never intended to be “master trusts” fall within the statutory definition and therefore must satisfy the requirements which apply to master trusts; and
- some schemes which do not currently qualify as master trusts might inadvertently fall within the statutory definition at some point in the future due to changes made to benefits and or structure of the scheme.
One example, which the Regulator has identified, is where a multi-employer defined benefit (DB) scheme decides to offer defined contribution (DC) benefits within the same scheme:
“Any occupational pension scheme which provides money purchase benefits for unconnected employers and is not a public service pension scheme will be classed as a master trust under the legislation.”
“We encourage trustees to approach TPR if they are considering carrying out any changes which may lead a scheme to fall under the master trust definition after the commencement date on 1 October 2018, as they will need authorisation before making the changes to continue to operate in the market.”
Such a scheme would immediately become a master trust upon this change being made, as such there is scope for many employers and trustees to get a nasty shock if they are not properly advised before making such changes. The Regulator has warned that they may order such schemes to be wound-up.
Indeed, we have had direct experience of some multi-employer schemes for unconnected employers and significant changes have had to be made by the employers and trustees of those schemes to ensure they didn’t need to comply with the new requirements which apply to master trusts. Several employers have taken the decision to wind-up these schemes and replace them with contract-based arrangements for future service.
The key message here is that Trustees and Employers need to think carefully before implementing changes to the benefits or structure of their schemes in order to avoid the risk of being ordered to wind-up their schemes.