19th May 2017 Anna Copestake interviewed by Lexis PSL re Pension Schemes Act 2017
As the Pension Schemes Bill receives Royal Assent and becomes the Pension Schemes Act 2017 (PSA 2017), Anna Copestake, senior associate, advises that PSA 2017 paves the way for a game-changing new legal and regulatory regime for master trusts that provide defined contribution (DC) benefits.
What provisions have been introduced by PSA 2017?
PSA 2017 has paved the way for a game-changing new legal and regulatory regime for master trusts that provide DC benefits. PSA 2017 itself introduces the legal framework, albeit with a number of its provisions yet to come into force, with the detail to be set out in regulations. Draft regulations have not yet been published, although we hope to see them soon.
Broadly speaking, a master trust for the purposes of the new regime is an occupational pension scheme that is used, or intended to be used, by two or more unconnected employers (subject to exceptions for public sector schemes). The regime only applies to the extent the scheme provides DC benefits. As you can see, the scope of PSA 2017 is far reaching. It is not limited to commercial master trusts nor does it exclude small schemes such as small self-administered schemes (SSASs). Further exceptions to the application of PSA 2017 may be contained in the proposed regulations, and we understand that one exception should be for master trusts whose only DC benefits are in the form of additional voluntary contributions.
The three key changes to be introduced by the new regime, as set out in PSA 2017, are as follows.
Master trusts will not be able to operate without authorisation from The Pensions Regulator (TPR). TPR will publish a list of authorised master trusts. Before it grants authorisation, TPR has to be satisfied that:
- those running the scheme are ‘fit and proper’ persons
- the scheme is financially sustainable—the scheme must have a sound business plan and can demonstrate capital adequacy (ie that it can meet its running costs and wind up costs). The aim is to try and ensure members pots are protected if the scheme fails or the provider leaves the market
- each ‘scheme funder’ is a separate legal entity that carries out only activities relating to the master trust—a scheme funder is a person who is required to fund the scheme if administration charges received from, or in respect of, members do not cover the scheme’s running costs, or a person who is entitled to receive profits if charges exceed running costs. Although on the wording of PSA 2017 there looks to be no actual requirement to have a scheme funder
- the scheme’s systems and processes are sufficient to ensure it is run effectively
- the scheme has an adequate continuity strategy (eg a plan to show how members’ interests would be protected if the scheme wound up)
The upshot is that master trusts will have to provide sufficient evidence to demonstrate the above to TPR.
As a slight aside, PSA 2017 also introduces powers relevant to the incoming ban on early exit charges. The Secretary of State is given power to make regulations that will override contracts between trustees and providers. However, I’ll focus on the master trust provisions for our purposes.
TPR will have regulatory supervision of master trusts and schemes will have to periodically send them certain documents such as their accounts and business plans. TPR may also introduce a specific master trust scheme return.
There will be additional whistleblowing duties on those involved in running the scheme (and its advisers) to inform TPR if they became aware of a ‘significant event’. Regulations will set out what these events are.
Mandatory wind up procedure
PSA 2017 sets out a number of wind up ‘trigger events’ for a scheme. These include:
- TPR withdrawing authorisation
- the insolvency or withdrawal of support of a scheme funder
- wind up being triggered under the scheme rules, and
- the trustees deciding that scheme sustainability is at risk and wind up is necessary
Where there is a trigger event, unless trustees choose to resolve that event (see below), they must follow the statutory wind up procedure. This involves transferring members’ benefits to another master trust (or another vehicle permitted by regulations). The regulations will set out details about member disclosure, opt out rights and trustee discharges on winding up. Importantly, the wind up provisions of PSA 2017 override conflicting provisions in the scheme rules. A master trust will only be able to be wound up in accordance with the statutory procedure.
There is no detail in PSA 2017 about how a trigger event is resolved. It might, for example, involve replacing an outgoing scheme funder. TPR must agree that the event has been resolved. This option is, however, not available if the trigger event was the withdrawal of TPR’s authorisation, in which case wind up is mandatory. During winding up, trustees submit an ‘implementation strategy’, which is a bit like a wind up plan and confirms where members’ benefits are being transferred. TPR must approve this. There will also be trustee reporting requirements and prohibitions on increases to member administration charges that apply during wind up. TPR will have powers to freeze scheme transactions (eg contributions in, transfers out and benefit payments).
The new regime will not only apply to new master trusts. It will apply, with modifications, to existing master trusts in operation before the authorisation requirements become law (the commencement date). For example, an existing master trust will have six months to apply for authorisation. There are also modified versions of the wind up provisions that apply where a trigger event took place between 20 October 2016 and the commencement date and in some of those circumstances the scheme funder has to meet the wind up costs. If the trigger event occurs after the commencement date the wind up provisions of PSA 2017 apply in full.
Have there been many changes made since PSA 2017 was first drafted?
There were a number of changes to the then Pension Schemes Bill put forward by both the House of Lords and House of Commons, and some rigorous debate about how the clauses of PSA 2017 will work. The majority of the changes were not that controversial. However, one proposed change that received a lot of press was around the establishment of a ‘funder of last resort’. There was much debate over whether to add a requirement for the government to establish a funder of last resort to manage cases where the scheme has insufficient resources to meet the costs of winding up (ie a form of lifeboat arrangement to avoid depleting members’ pension savings to pay for wind up costs). The debate focussed on the need to balance member protection with the cost of the lifeboat arrangement—how would it be paid for? It was eventually agreed that this requirement would not be added. The view of the House of Commons was that the framework in PSA 2017 provided sufficient member protection and a lifeboat arrangement would be disproportionate.
What is the impact of PSA 2017 for pensions lawyers and their clients?
The devil will be in the detail and so we really need to see the regulations to fully understand the scope and workings of the new regime. We will also have to pay attention to when the remaining key provisions of PSA 2017 come into force (eg around authorisation). Nevertheless, there will be significant changes for the master trusts to get to grips with. There will be an investment of time and cost in ensuring authorisation is obtained on time. New ongoing governance requirements to ensure proper business plans are in place, financial sustainability is well managed and the right people are doing the right jobs for the scheme will be no mean feat to comply with.
The large players in the master trust market are likely to have many if not all of the cornerstones for compliance with PSA 2017 in place, although there will inevitably be a number of hoops to jump through to document this in the correct way.
For a number of other master trusts, a significant amount of work may be required to meet the new requirements and obtain authorisation, and there is the potential application of the mandatory wind up provisions for providers to consider. It is important to note that existing master trusts may find themselves under an obligation to notify TPR about trigger events that happened since 20 October 2016 and to ensure any increases to member charges were retrospectively compliant.
Consequently, we are likely to see further consolidation in the master trust market as a result of this new regime. The key for those exiting the market at the moment will be to ensure they still comply with PSA 2017 (eg applicable retrospective obligations if wind up was triggered since 20 October 2016). The Pensions Regulator has published some helpful interim guidance about the retrospective duty to notify it of wind up trigger events.
Interviewed by Kate Beaumont.
This article was first published on Lexis®PSL Pensions on 2 May 2017. Click for a free trial of Lexis®PSL.
The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. ARC Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.