UK Pensions - Pensions Regulator publishes draft master trusts code of practice
From this October, master trusts will need to apply to the Pensions Regulator for authorisation. If an existing master trust chooses not to apply for authorisation or does not meet the authorisation criteria, it will have to wind up and exit the market. Applying for authorisation – and ensuring the application demonstrates that the master trust meets all the authorisation criteria – is therefore critical for such schemes.
Given that the deadline for applying for authorisation is fast approaching, trustees will welcome the publication by the Regulator of its draft code of practice on the authorisation and supervision of master trusts, together with its draft decision-making procedure. A consultation document has also been published, which includes a template form for responding to the consultation.
What is a master trust?
In broad terms, a master trust is an occupational pension scheme which provides money purchase benefits and is used by two or more unconnected employers. Some exceptions apply – for example, a scheme will not be a master trust where the only money purchase benefits it provides are additional voluntary contributions.
What is master trust authorisation?
From October 2018, existing master trusts will have six months to apply to the Regulator for authorisation – they will be unable to operate without authorisation after 1 April 2019. New master trusts must be authorised before starting to operate.
To authorise a master trust, the Regulator must be satisfied that the scheme meets five authorisation criteria:
1. that those involved in the scheme are fit and proper persons;
2. that the scheme is financially sustainable;
3. that each scheme funder meets the scheme funder requirements (broadly, a scheme funder is a body corporate or partnership which receives the profits from the master trust and is liable to make good any shortfall in the master trust);
4. that the systems and processes used in running the scheme are sufficient to ensure that it is run effectively; and
5. that the scheme has an adequate continuity strategy.
If the Regulator is satisfied that the authorisation criteria are met, it must grant the authorisation; if it is not satisfied that the criteria are met, it must refuse authorisation.
The draft Code of Practice
The draft code of practice runs to 85 pages and sets out in detail:
- the matters that will be taken into account by the Regulator in deciding whether the master trust meets the authorisation criteria – this part of the code is structured around the five authorisation criteria mentioned above; and
- the process for applying for authorisation.
Whilst the code mainly provides supporting detail to the draft regulations, it includes several new concepts for master trusts to consider:
- Financial sustainability: the business plan setting out the master trust’s expected activities, growth, objectives and funding will be critical to the Regulator’s assessment of whether a master trust meets the authorisation criteria. The business plan must be less than six months old and must outline a sound business strategy that leads to a point where the master trust requires no third party financial support. The business plan should highlight specifically whether the master trust is used for auto-enrolment and whether it operates (or plans to operate) in the consolidation of other schemes.
- CALP: the costs, assets and liquidity plan (“CALP”) will form part of, or accompany, the business plan and provides the key financial information about the master trust and its financial sustainability. The CALP is divided into: (i) costs; (ii) income; (iii) assets to meet costs; and (iv) liquidity of those assets (the Regulator expects 25% of the projected running costs to be held in cash).
- Financial reserves: any assets held by the scheme funder for the master trust’s financial reserves should be ring-fenced and equal to an amount per member as set out in guidance (the “basic method”) or a lower amount based on a prudent calculation of necessary costs (the “detailed method”).
- Scheme funder: the scheme funder may request an exemption from the requirement that it must only carry out activities relating directly to the relevant master where, for example, such activities are too interwoven into the wider business of the scheme funder to economically untangle, or where splitting the scheme funder from other group operations would reduce the security of the scheme funder or increase costs to members.
- Systems and processes: the scheme needs to complete data reconciliations on the administration system once a month, and establish policies for decision-making where the interests of the scheme strategist and the scheme funder may conflict with the interests of scheme members.
Despite the length of the code, the Regulator intends to publish further guidance during the consultation period. This is intended to provide more practical information on how trustees can demonstrate that the scheme meets the authorisation criteria.
The draft decision-making procedure sets out the process the Regulator expects to follow in deciding whether or not to grant authorisation. Broadly, the Regulator’s authorisation team will provide a preliminary recommendation to the Determinations Panel in its role as “decision maker”. The Determinations Panel will either approve the authorisation, or ask the master trust to make written submissions and attend an oral hearing before making a final decision. This process is more layered and detailed than many in the industry had initially expected, and will help to alleviate concerns that master trusts could be faced with a “cliff edge” authorisation process without the ability to appeal.
The consultation on the draft code closes at 12 noon on 8 May 2018 and, as noted above, further guidance is expected to be published shortly. The Regulator has indicated that master trusts will be able to submit draft applications from May and the Regulator will aim to give feedback by 31 August. Further details about this process, together with a checklist, can be found here. If master trusts are in a position to take advantage of this process, it is likely to be a valuable “dry run”, with the opportunity to address any issues highlighted by the Regulator before the final application is submitted.
Last week, the government published a response to its consultation on the draft regulations which set out the legislative framework for the new authorisation and supervision regime for master trusts. However, we are still awaiting the final form of the regulations – the government has said it intends to lay the draft regulations before Parliament in time for them to come into force on 1 October 2018.
For more information on master trusts and the new authorisation regime, please speak to your usual Linklaters contact.