Government must quickly clarify extent of structural changes for master trusts under new laws

The Pension Schemes Bill could have particular consequences for 'white labelled' master trusts in particular, and could require "major structural changes" to be made of other trusts, said pensions expert Mark Baker of Pinsent Masons, the law firm behind Out-Law.com, ahead of a 'second reading debate' on the legislation in the House of Lords.

'White labelled' trusts are operated by pensions providers, but an independent financial adviser (IFA) is permitted to use a section of the trust for its own clients. Many of these trusts are relied upon by smaller and medium-sized employers seeking a pension scheme into which to automatically enrol their workforce.

However, Baker said that it was not currently clear whether IFAs involved with white labelled trusts would be required to comply with the new 'fit and proper' requirements for those operating master trusts, as set out in the Pension Schemes Bill. It was also unclear whether the trustees would be required to monitor the IFA's financial status, as part of new requirements that master trusts be "financially sustainable" and have an adequate continuity strategy in place in the event of scheme failure, he said.

"We could easily see some white labelled sections going out of business," he said.

"The bill suggests that every provider must move its master trust into a standalone company with no other operations or employees. This would be a major structural change that will cost providers time and money, and is another point that it's really vital for the government to clarify quickly," he said.

Master trusts, which enable pension scheme providers to manage a defined contribution (DC) scheme for several employers under a single trust arrangement, provide an option for smaller employers that do not necessarily have the resources to operate a pension scheme of their own to comply with their automatic enrolment requirements.

The Pension Schemes Bill is intended to address the fact that these arrangements have traditionally been subject to a lighter touch regulatory regime than contract-based schemes, such as group personal pension schemes (GPPs), which are regulated by the Financial Conduct Authority (FCA). If passed in its current form, the bill would introduce tough new criteria for master trusts and give the Pensions Regulator more powers to authorise and de-authorise trusts that do not meet these criteria.

Baker said that the introduction of authorisation criteria would "fundamentally change" the relationship between providers and trustees.

"Trustees will have a raft of new responsibilities, including maintaining the trust's authorisation," he said. "Some providers will need to look urgently at whether their trustees are comfortable with these responsibilities. If not, we could see significant changes to trustee boards."

The bill was also unclear over whether non-commercial, industry-wide schemes would require authorisation in line with the new requirements, Baker said.

"This must be clarified quickly, as some of those schemes will face big structural decisions," he said.