Out-Law News 3 min. read

Intention to create pensions 'level playing field' behind government master trust reform, says expert


Pension reform plans currently before the UK parliament will help to create a "level playing field" between multi-employer master trust arrangements and group personal pension (GPP) schemes, an expert has said.

The government has published a new briefing paper on master trust regulation (54-page / 507KB PDF) for MPs, ahead of the arrival of the Pension Schemes Bill for debate in the House of Commons. The bill, which was introduced to the House of Lords in October, is due to have its third and final reading there on Monday, 16 January.

If passed in its current form, the Pension Schemes Bill will introduce tough new criteria that master trusts will be expected to meet. It would also introduce a new 'fit and proper' test for persons involved in the scheme, require the scheme to be financially sustainable and to have an "adequate continuity strategy" in place should the scheme get into financial difficulties. New rules would also be introduced for scheme funders, while the Pensions Regulator would be given tougher powers to take action against those schemes that do not meet the criteria.

An amendment to the legislation proposed by Labour peer Baroness Drake was narrowly approved by the House of Lords just before Christmas, despite opposition from the government. This amendment, which may be overturned by the House of Commons, would require the government to "make provision for a funder of last resort" in the event of scheme failure.

"The Pension Schemes Bill puts defined contribution (DC) master trusts on notice that there will be minimum standards to hit under a new authorisation process," said pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com.

"Many master trusts will not be troubled by this. They already operate to very high standards. Others may need to make up ground in order to come through the authorisation process. This will take time and additional investment. We've already seen the prospect of authorisation prompt some consolidation in the market," he said.

Master trusts enable pension scheme providers to manage a DC scheme for several employers under a single trust arrangement, making them particularly attractive for smaller businesses which are now legally required to automatically enrol their workforce into a suitable pension scheme. Although master trusts are required to comply with the relevant pensions legislation and are expected to comply with the standards set out in the Pensions Regulator's codes of practice, they are not subject to the same requirements as the contract-based GPP schemes regulated by the Financial Conduct Authority (FCA).

Currently, master trusts can obtain independent assurance of their quality, measured against a voluntary assurance framework developed by the Institute of Chartered Accountants of England and Wales (ICAEW). Trusts that have done so are listed on the Pensions Regulator's website, alongside 'well-run' GPPs that meet similar criteria. However, there is no legal requirement that master trusts obtain this assurance.

The new briefing report noted that "part of the point" of the Pension Schemes Bill was "to create a level playing field between the different forms of workplace pension scheme", Barton said.

"The authorisation process is very broadly along the lines of the standards GPPs are already required to operate to under FCA regulation," he said.

"But as we enhance the governance standards in master trusts, it seems appropriate to consider the constraints on GPPs. In the context of a workplace scheme with overwhelming numbers of default investors, there's a strong rationale for enabling GPPs to undertake the sort of 'without consent' transfer and investment switches that go on all the time in master trusts and occupational DC schemes," he said.

The government is currently seeking views on how it can simplify bulk transfers of members from one DC scheme to another without seeking the consent of individual members, in a way which retains adequate protections for those members. The existing rules have the potential to be overly burdensome for DC schemes, as they were designed for and are more suited to defined benefit (DB) schemes, according to the government's consultation, which closes on 21 February.

Pensions expert Mark Baker of Pinsent Masons said previously that part of the challenge for the government would be in coming up with a framework that copes with master trusts "of all shapes and sizes" in the regulations accompanying the final legislation.

"The bill suggests that every provider must move its master trust into a standalone company with no other operations or employees," he said. "This would be a major structural change that will cost providers time and money."

The legislation as drafted could have particular implications for so-called 'white labelled' master trusts, in which each section of the trust is operated by a commercial partner or other third party, he said.

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