A new authorisation code requiring mastertrusts to demonstrate their financial sustainability may force a number of providers from the market, experts have speculated.
In April last year, the Pension Schemes Act 2017 established a framework for an authorisation and supervisory regime for defined contribution mastertrusts.
This week, the regulator released an accompanying code of practice for the regime. Chief among its stipulations was the need for schemes to supply a "sustainable breakeven" point to the Pensions Regulator.
It might make some of those schemes question whether they want to go through the authorisation process
Helen Ball, Sackers
The regime will demand evidence of financial sustainability across mastertrusts. Schemes will have to include a "continuity strategy" with their application for authorisation.
A continuity strategy will outline how a scheme will protect members from the fallout of a "triggering event". It will describe how a mastertrust may be closed down or how a triggering event, which may prevent a scheme from continuing to operate, would be resolved.
Schemes may leave the market
Mastertrusts have six months to apply for authorisation from October 1 2018. Helen Ball, head of DC at law firm Sackers, suggested that a number of mastertrusts will need to consider their place in the market before applying for authorisation.
The need for items such as a business plan and a continuity strategy may prove too burdensome for some schemes, she said.
“It might make some of those schemes question whether they want to go through the authorisation process,” she added.
The authorisation criteria
Fit and proper: All assessed individuals must meet standards of honesty, integrity and knowledge appropriate to their role.
Systems and processes: Mastertrusts must have sufficient IT systems and processes in place.
Continuity strategy: Schemes will need a strategy on how members will be protected if there is a triggering event, how a mastertrust may be closed down or how the triggering event will be resolved.
Scheme funder: Any scheme funder must be a body corporate or partnership and only carry out activities relating directly to mastertrusts, unless exempt.
Financial sustainability: The scheme must have enough financial support to ensure it can operate on a day-to-day basis and to cover the costs following a triggering event. A business plan will form part of this.
Adrian Boulding, policy director at mastertrust Now Pensions, said that the need to provide a sustainable breakeven point will be particularly onerous for some providers.
The regulator is aiming for mastertrusts to eventually meet their financial sustainability obligations “solely through charges on members and/or participating employers”, according to the code. This is referred to as "sustainable breakeven".
Boulding said: “The parent companies that have been providing this funding will find it tough, because searching questions are going to be asked, not just of the mastertrusts, but also of the parents that have been providing the funding through to breakeven point."
The code is less clear for unconventional schemes
Despite the praise the code has received for its level of detail, some experts highlighted flaws.
Alice Honeywill, pensions partner at law firm Burges Salmon, said that the paper lacks clarity on regulation for “non-standard” schemes, such as schemes providing a mixture of defined benefit and DC benefits, or cross-industry schemes.
“It’s always been less clear how you’re going to be able to comply and what evidence will be required,” she said, adding that “more detail would be needed” from the regulator.
Tim Gosling, DC policy lead at the Pensions and Lifetime Savings Association, praised the code, but expressed concerns over the regime’s requirements for "scheme strategists".
The scheme strategist will be an individual or a group that will take responsibility for operating the scheme. They will produce the business plan and the continuity strategy.
“We’re a little bit cautious about identifying exactly who the scheme strategist is. I’m not entirely sure we’ve completely nailed down who that is going to be in every single organisation,” he said.
“It’s also not yet clear what weight will be given to different forms of external evidence, particularly in relation to the systems and processes requirement, and what weight will be given to the mastertrust assurance framework,” he added.
Authorised schemes will require adequate IT systems and processes. The mastertrust assurance framework, which already exists, offers an independent review of schemes against set criteria provided by the regulator.
Schemes may overcook their continuity strategies
A scheme that is not authorised, or is de-authorised, will have to transfer members to an authorised mastertrust. This event will be covered in the scheme’s continuity strategy.
Andy Tarrant, head of policy and government relations at mastertrust The People's Pension, predicted that some schemes may get “carried away” with their continuity strategies.
Government lowers mastertrust authorisation fees
The government has announced that proposed fees for mastertrust schemes seeking authorisation have been revised downwards.
“In the event of a wind-up, we’d have to say the kind of organisation that we’d transfer members to – not exactly who we’d transfer to,” he said, predicting that others might be more specific.
Tarrant sees the new regime as a positive move away from a tick-box approach to regulation.
“It does lead to a mechanism where you’re responsible for undertaking your own assessment and making a sensible judgment,” he said.
