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Pensions Update

What will happen with the new master trust regulation now we are in the wash up period?

The 'wash-up' period is the last few days of a Parliament, before dissolution. All the unfinished business of the session must be dealt with and the Government seeks the co-operation of the Opposition in passing legislation that is still in progress. Some Bills might be lost, others might be progressed quickly but in a much-shortened form.

Because all outstanding issues have now been settled with the Pension Schemes Bill and it is just waiting for Royal Assent; and because it is putting in place valuable protection for members of master trust pension schemes, we expect that the Bill will be pushed through Parliament before Parliament dissolves but we cannot be sure of this.

What does the Bill do?

Master trusts have gained huge popularity as new types of investment vehicles for auto enrolment, over for example group personal pension plans. Essentially they are trust-based occupational pension schemes which allow non -associated employers to participate and which are set up to provide maximum economies of scale by pension providers. While they have their own set of trustees, the provider supplies administration and investment services to the trustees.

As a new type of investment vehicle, there have been concerns about their regulation and the reputation of the pensions industry if potentially unstable master trusts collapse, with scheme members losing their auto-enrolment pension savings. The current legislation assumes there are just single employer schemes where the employer has an ongoing interest in the running of the scheme, rather than master trusts set up to make a profit. Although there is already a master trust assurance framework developed by the Pensions Regulator and the Institute of Chartered Accountants in England and Wales, this is voluntary and does not go far enough. So for example it does not address risks relating to financial stability and ensuring the provider holds sufficient capital in reserve.

The Pension Schemes Bill therefore aims to give the Pensions Regulator (TPR) greater power to enforce where key criteria have not been satisfied by:  

  • Introducing an authorisation and supervision regime for master trusts. Master trusts must show TPR they meet certain key criteria on establishment, and then continue to do so.
  • Existing master trusts being brought into the regime and required to meet the new criteria.
  • Placing requirements on trustees to act in certain ways if a master trust winds up or closes – to ensure member protection members.

The Bill however only sets out the broad new regulatory framework; regulations will be needed to flesh out the detail. Initial consultation on these details is due in autumn 2017, with implementation planned for October 2018 although with some provisions being backdated to October 2016.

The main points of debate to date have been:

  • Whether to put in place a funder of last resort so that if there is regulatory failure and a master trust cannot finance its winding up, there would still be some member protection and certainty as to who bears the costs of the winding up. However the Government has won through and there is no funder of last resort in the final version of the Bill.
  • How to achieve member engagement. This is a particular problem as the employer chooses the master trust for the member but does not have the same incentive as the member (for example, to ensure good outcomes and value for money). This will be governed by new regulations to ensure TPR takes account of a scheme’s systems and processes for member communications and engagement in making decisions on applications for authorisation.
  • Whether the master trusts need to have a separate scheme funder for activities relating directly to the master trust. This would increase costs where schemes are funded by an FCA-regulated entity as they already have robust capital requirements and can benefit from economies of scale, with shared staff, systems and premises for multiple business lines. However, the Government thought this type of separation was essential for TPR to be able to assess the financial position of the scheme with certainty but it has added some flexibility by allowing for exceptions and also allowing a scheme funder to be responsible for more than one master trust.
  • Whether conflicts of interest will be dealt with effectively for those master trusts set up for profit, with shareholder obligations. The current approach is to deal with this through the governance requirements applying to occupational pension schemes generally but this may not be sufficient in practice.
  • The impact of a ‘pause order’ where TPR can require schemes to pause certain activities members’ rights to contributions or to payment of their pension following a triggering event. This is to allow TPR time to go in and make sure the problem was sorted.
  • The extent of charges that can be applied. Transfers by master trust providers are being restricted so it is not easy to escape the charge restrictions by just transferring pension benefits out of the master trust regime and in a pause position, it is not possible for the master trust provider just to increase charges.

The draft Bill has also been altered to stop the Bill applying to those industry wide non associated defined benefit schemes which provide money purchase additional voluntary contributions.


While the substantive points have now been thrashed out, the new, much needed regulation will not be in place until October 2018 at the earliest. This means there is quite a considerable gap in the current legislation and TPR powers as regards existing master trusts which potentially puts members in a vulnerable position in the meantime. There are also concerns about the extent to which the TPR will have the resources and experience to police master trusts in this way and whether the FCA would be better placed to do so. From the employer’s perspective it means no one can claim to be using a state of the art master trust for their employees as no one knows quite what this will.

Pensions Law Update - April 2017

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