Pensions Bulletin 2016/43

Our viewpoint

Government sets out new statutory regime for master trusts

The Government has set out its vision for the regulation of master trusts by introducing the Pension Schemes Bill in the House of Lords last week.

Master trusts developed following the introduction of auto-enrolment and are, broadly, multi-employer occupational pension schemes for unconnected employers where some or all of the benefits are money purchase.

Master trusts have steadily climbed the Government’s list of pension priorities as they have increased in size and concerns over the operation of some of them have mounted.  According to the Bill’s explanatory notes, as at January 2016 there were 84 such schemes, with over four million members and £8.5bn of assets.

The Queen’s Speech in May promised action in this area (see Pensions Bulletin 2016/20).  Prior to this the Pensions Regulator made master trusts one of its regulatory priorities (see Pensions Bulletin 2016/16).

The Bill targets specific areas of risk arising in master trusts compared to other occupational pension schemes – including employer engagement with the scheme, the profit motive for most master trusts, the volume of savers involved and the potential impact on confidence in pensions should a scheme fail and its exit from the market not be properly managed.

The Bill provides for:

  • An authorisation and supervision regime – master trusts will have to demonstrate to the Pensions Regulator that they meet key criteria on establishment and then continue to do so
  • Requirements on trustees to act in certain ways in the event of wind up or closure of a master trust to protect members
  • Greater powers for the Pensions Regulator to take action where the key criteria are not met

The authorisation regime has five main requirements, namely that:

  • Key individuals in the master trust are “fit and proper” to act in their roles. These include the person who establishes the scheme, trustees of the scheme, individuals who have the power to appoint or remove trustees or who have the power to amend the scheme’s trust deed, the “scheme funder” and the “scheme strategist”.  Additional roles subject to the test may be added by regulations
  • The master trust has a sound business strategy with sufficient financial resources to meet the costs of setting up and running the scheme and to comply with requirements to protect members where an event occurs that may lead to the scheme closing or winding up. To this end, the scheme strategist must prepare the scheme’s business plan
  • The master trust’s scheme funder is a separate legal entity, meaning it must be a legal person that only carries out activities that relate directly to that master trust
  • The master trust has adequate systems and processes in place
  • The scheme strategist must prepare a continuity strategy setting out how members will be protected if a master trust has a “triggering event”. These include events likely to lead to closure, unless action is taken, such as the scheme funder becoming insolvent, ending its relationship with the master trust, or a decision to wind up

The Bill also provides for transitional provisions for existing master trusts to come into this regime.

The existing voluntary master trust assurance framework (see Pensions Bulletin 2016/38) that some existing trusts follow is not mentioned in the Bill.  The impact assessment says that the Government has chosen not to make this framework mandatory because it would not address the key gaps in the regulatory regime that the Bill is now seeking to address.  Nevertheless, we understand that, subject to regulations, the Pensions Regulator will use this framework for its starting point in deciding whether master trusts meet the new requirements (particularly in relation to adequate systems and processes).

Apart from master trusts, the other measure in the Bill is an enabling clause to permit the Secretary of State to make regulations to override terms of contracts that contain charges now prohibited by the 2015 charge cap regulations.


The Government is rightly concerned that the rapid expansion of commercial master trusts, driven by profit rather than employer paternalistic motives, have been accompanied by a risk of failure which could cause thousands of people to lose their pension benefits.  So action is needed.  The prospect of this new regime is likely to drive consolidation, sorting the wheat from the chaff, with the master trusts that become authorised being reliable, secure and well-run.

However, as the legislation is currently drafted, some multi-employer schemes with money purchase benefits but which are not commercial master trusts, such as in the charity, educational and not-for-profit sectors, will be required to obtain master trust authorisation.  This would cause significant financial strain on these schemes.  We hope that the regulations to come will acknowledge this.

FRC’s review of company annual reports highlights pension risk

The Financial Reporting Council has published its Annual Review of Corporate Reporting 2015/16 in which it scrutinises UK companies' annual reports and highlights areas where it wants to see improvement.

The review paper gives reporting of pension schemes a high profile, with the executive summary stating that “continued low interest rates and the economics of defined benefit pension arrangements have increased the need for companies to improve the transparency of their pension arrangements”.

It also identifies the following areas of focus for pensions reporting:

  • Disclosure of pension risk. The paper notes that recent corporate failures have highlighted the risks to companies’ viability arising from their DB schemes
  • Disclosure of pension scheme assets, particularly for more complex assets such as insurance contracts and longevity derivatives
  • Compliance with the complex rules on recognising pensions obligations in IFRIC Interpretation 14. The FRC has reiterated its view, given in last year’s paper, that companies should disclose the extent to which their accounting policies are consistent with the exposure draft of proposed changes to IFRIC 14 issued in June 2015


This paper signals that pensions will once again be a key issue for the FRC as it scrutinises company reports and writes to finance directors about areas of concern next year.  It will, as usual, be of great interest to companies as they prepare to produce their annual reports this year end.

PLSA’s DB taskforce reports

In an interim report published by the Pensions and Lifetime Savings Association on DB schemes, four findings are made on which it is suggested that public policy interventions could focus.  They are as follows:

  • The DB landscape is too fragmented – work should be undertaken to investigate the potential for scheme consolidation, which could help secure more economically viable schemes, better able to deliver value to scheme members and their sponsors
  • Regulation and legislation is inflexible – work should be undertaken to investigate how changes could deliver better solutions to scheme resolution and remove regulation that adds cost but has little or no tangible benefit
  • The current approach to benefit design and benefit change is rigid – work should be undertaken to investigate how a more flexible approach to benefit design could be implemented to help sustain schemes
  • The current approach to pension scheme risk bearing is sub-optimal – work should be undertaken to develop better measures of benefit risk

On this last point the DB taskforce suggests that the trend observed over the past decade of DB schemes de-risking their investment strategies will not necessarily reduce the losses that members may experience (when weighted by the probability of corporate failure), but certainly has transferred risk from the scheme to the sponsor.  And even with the welcome existence of the PPF, members can lose as much as 20% of their accrued benefits once account is taken of the compensation cap and the lower indexation available on PPF compensation – a risk for which member awareness is low.


Much of the report is taken up with summarising the current issues that are adversely affecting DB schemes, leaving no space to explore potential solutions – this is to occur over the next six months, perhaps to tie in with the Government’s timetable on DB regulatory reform?

The novel idea within this report is that DB scheme members may be better off if their schemes re-risk – ie invest more in risk-seeking assets such as equities.  Although the authors do not go on to develop this thought, there is a suggestion that DB schemes should also focus more on the likelihood of meeting their cash flows than mending volatile deficits.  They are not alone in suggesting this (for example the CBI also makes a similar suggestion – see the next article), but further work is needed to see whether methods that focus on cash flows merely re-package the same DB risks and perhaps in a flattering light.

CBI lobbies for DB scheme employer easements

The CBI has issued a pamphlet that makes four requests of Government in relation to the regulation of DB schemes:

  • Flexibility in scheme funding plans – whilst accepting that it may be necessary to adjust the Pensions Regulator’s powers to ensure it remains effective, when it comes to scheme funding, the CBI says that Government should restate its support for the Regulator’s objective of minimising any adverse impact on the sustainable growth of an employer, and make clear that there is no pre-set right approach on recovery plan length, noting that the Regulator needs to operate on a case-by-case basis
  • Modernise inflation indexation – the Government should move to ensure all schemes can use CPI as their inflation measure if that is their wish. It should also launch a review to ensure that schemes that have existed for decades are not bound by any other changes in law and practice that are now defunct
  • Address the negative spiral created by funding measurement – the CBI says that the current approach, focussed on “gilts plus” when discounting liabilities, is not fit for purpose, as the current low gilt rates exacerbate trustees’ caution on the “plus” part, driving assets into matching liabilities rather than investing in infrastructure and equity. So “Government must address the issue of self-defeating liability and investment decisions within the DB landscape, taking action in partnership with business to help trustees take a longer-term and more balanced view”
  • Generate better investment returns – through a variety of means, such as allowing pension schemes to invest in a greater range of assets. The CBI asks the Government to “work with business to improve access to investment opportunities which generate returns over the long term for schemes and boost our economy”


The CBI sees the current approach to scheme funding “damaging growth and pensions”, but does not put forward an alternative.  However, there is little doubt that the debate is now starting in earnest on whether the current orthodoxy is now broken.

Institute of Directors seeks strong action following BHS

There are significant gaps in the UK’s pension regulatory regime exposed by the BHS scandal, according to Lady Barbara Judge, the chairman of the Institute of Directors, in a short paper earlier this month.

The hard-hitting paper claims that there is a “fundamental breakdown in the UK’s regulatory regime”.  The author, who recently stepped down as Chair of the Pension Protection Fund, places part of the blame with the Pensions Regulator, saying that it must address failings in its processes “so that the highest-risk schemes are more prevalent on their radar” and that it “should be particularly vigilant when a firm is to be sold”.

She also proposes that:

  • The Regulator should be given a binding veto over merger and acquisition activity, in firms of a certain size, where a sale does not come complete with a clear and obvious statement of how any pension fund deficit will be met in the future
  • An individual, named non-executive board member should be given responsibility for monitoring and reporting on the pension fund deficit at a particular number of board meetings every year, and in detail in the Annual Report

FRC tweaks SMPI assumptions

The Financial Reporting Council has published a revised version of Actuarial Standard Technical Memorandum 1 which sets out the basis on which annual statutory money purchase illustrations (SMPIs) should be determined.

Version 4.2, which is effective for SMPIs issued on or after 6 April 2017, makes two changes to the mortality assumptions to reflect up-to-date experience, following new and proposed publications by the Institute and Faculty of Actuaries’ Continuous Mortality Investigation.

The changes are the same as those made by the Financial Conduct Authority for point of sale and in-force business projections in PS16/12: Pension reforms – feedback on CP15/30 and final rules and guidance (see Pensions Bulletin 2015/43).

Pension scams – only a handful are facing prosecution

The difficulty of tackling pension scams has been exposed in a written Parliamentary Question and Answer submitted by Ros Altmann, the former Pensions Minister, now acting in her backbench capacity in the House of Lords.

The Government has revealed that, whilst there have been over 2,000 reports collated by the National Fraud Reporting Centre since the start of 2014, over the same period only 7 people have faced prosecution.

This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law.  For further help, please contact David Everett at our London office or the partner who normally advises you.

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