Pensions Bulletin 2018/13

Our viewpoint

Master trusts Code of Practice published – the main course is served

The Pensions Regulator has published the long-awaited consultation on the draft Code of Practice for master trusts and after the hors d’oeuvre of the consultation response on regulations last week (see Pensions Bulletin 2018/12) the Code is a rich and filling main course – but it may cause some indigestion!

A master trust is defined by the Pension Schemes Act 2017 as broadly a multi-employer occupational pension scheme for unconnected employers where some or all of the benefits are money purchase.  Since the launch of auto-enrolment in 2012 the master trust market has increased dramatically, but until now without any form of authorisation and supervision.

The Regulator clearly intends that master trusts should operate in a similar manner to other large financial institutions with detailed business plans and financial reserves in place.  It notes that the new Code is a significant departure from previous codes as it outlines a new way of operating for the Regulator – for the first time it will be directly authorising and supervising particular pension schemes.

Compliance with the Code should be relatively straightforward for “commercial” master trusts established by insurance companies and the like in order to make a profit.  But the requirements could cause significant problems for “accidental” master trusts which have existed for years and just happen to fall into the Act’s definition.  This could apply to multi-employer pension schemes set up by religious or educational organisations for example.

The Code is lengthy and detailed at 85 pages long.  Although it is titled “Authorisation and supervision of master trusts” the Code is very much focussed on what master trusts need to do to achieve authorisation, with the inference that the Regulator will use these authorisation standards as the starting point for ongoing supervision.

There is far too much in the Code to set out here, so instead we offer a smorgasbord of a few of the tastiest titbits to sample:

  • Master trusts are required to have a business plan that illustrates the scheme’s viability and objectives and should cover a period of three to five years. This should be a comprehensive narrative providing the detail required in legislation and in the Code; including key delivery milestones which are measurable
  • Master trusts are required to demonstrate they have access to sufficient financial resources in order to operate. This financial sustainability requirement is split into two parts
    • Running costs (set up and ongoing) – the Regulator’s focus will be on how this compares with the expected income and the Scheme funder’s ability to meet any shortfall before the master trust reaches a “sustainable break even”
    • Financial reserves (which should be ring-fenced) – to enable the scheme to keep running after a triggering event and while that triggering event is resolved. These reserves can be calculated using a basic method of an amount (yet to be announced) per member or a detailed bespoke method based on the master trust’s own calculation of the necessary costs.  This latter method will attract increased scrutiny from the Regulator
  • Master trusts will produce a Cost, Assets and Liquidity Plan providing key financial information about the scheme and its financial sustainability – ie information about the costs and income in relation to money purchase benefits, the assets held to meet these costs and the liquidity of those assets
  • Key personnel involved with master trusts such as the Trustee(s), Scheme funder, Scheme strategist, and persons with the power to appoint/remove trustees will have to pass “fit and proper” tests demonstrating, amongst other things, that the Trustee has sufficient experience and skill to run the scheme
  • There are also requirements to demonstrate in detail that the master trust’s systems and processes are robust and up to the task of administering the scheme’s benefits

The Act requires that from the date of commencement of the new regime (1 October 2018), no new master trust can be operated without authorisation.  Master trusts set up before then need to apply for authorisation by 31 March 2019 or else decide to wind up the scheme.  The Regulator must decide whether to authorise a scheme within six months of receiving an application.  The Regulator has issued a draft procedure note setting out how it will make these decisions.

The Regulator has issued a further document setting out several consultation questions on the Code of Practice.  Responses must be received by midday on 8 May 2018.

The Pensions Regulator is offering a “readiness review” service from early May for at least four weeks.  Using this, schemes may submit a draft authorisation application to the Regulator.  But the Regulator is at pains to point out it will only provide feedback about the quality of the evidence in the draft application and not whether the scheme will or will not be authorised.


Whilst it is sensible to have a proper consultation period about such a major regulatory shift such as this, the fact that the Code will only be fully finalised sometime after 8 May is likely to lead to a very busy summer for affected parties.

The authorisation regime for master trusts seems far removed from the concept of an employer promise backed up by a trust vehicle.  However, it is only right that master trusts are subject to a rigorous authorisation and supervision regime, akin to that operated by the FCA for personal pension providers.  The scale and growth of master trusts will soon put some of them into the “too big to be allowed to fail” category of pension schemes, if they are not already there.

The downside of this tough regime will be for “accidental” master trusts; namely employer-sponsored DC schemes which have perhaps grown over time and were not intended to be master trusts, but fall into the definition through a quirk of fate.  Managers of such schemes need to do some hard thinking very quickly to set up a project plan to achieve authorisation or else decide another way forward.

FCA announces changes to DB pension transfer advice rules and consults on some more

The Financial Conduct Authority has finalised its new rules on pension transfer advice from DB schemes, following a consultation last year (see Pensions Bulletin 2017/26).  It is also starting a fresh consultation on further changes, including potential adjustments to adviser charging structures.

The new rules and the FCA’s response to its consultation are set out in Policy Statement PS18/6: Advising on Pension Transfers.  This makes clear that the following are going ahead:

  • The proposals to change the current transfer value analysis (based on the so-called critical yield analysis), with a tailored “appropriate pension transfer analysis” coupled with a mandatory “transfer value comparator” (which shows in graphical form, that by choosing to give up DB the individual may lose £x of value, where x is to be calculated on a prescribed basis)
  • The rule to require all advice in this area to be provided as a personal recommendation, which fully reflects the client’s circumstances and provides a recommended course of action; and
  • New guidance on the role of the pension transfer specialist

However, the FCA’s proposal that the starting point when framing advice should be more neutral than the present assumption that a transfer will be unsuitable is not to go ahead.  Although the FCA says that this is because of concerns it has that a significant proportion of advice it has seen is unsuitable (see Pensions Bulletin 2017/41), it seems that the FCA has also retreated in the light of adverse comment from some MPs, particularly in the light of events concerning British Steel.

Most of the new rules and guidance come into force on 1 April 2018, but the transfer value comparator and appropriate pension transfer analysis starts on 1 October 2018, and some changes to assumptions used in the analysis come into force on 6 April 2019.

The FCA’s fresh proposals are set out in in Consultation Paper CP18/7: Improving the quality of pension transfer advice and are premised on the FCA’s separate findings that “there is considerable risk from unsuitable advice which may lead to significant harm for consumers” which the FCA goes on to quantify as being up to £720m pa.

The ground covered includes the following:

  • Improving the qualifications required to advise on or check pension transfers – to come in by October 2020
  • Making clear that where one firm advises on the transfer and another on the proposed investments in the receiving scheme, there is appropriate working together
  • Ensuring that advisers should explore each client’s attitude to the general risks associated with transferring away from DB, as well as their attitude to investment risks; and
  • Requiring firms to provide a suitability report to clients regardless of the outcome of the advice – at present, if the advice is not to proceed, there is no requirement to provide the client with a report

The FCA also starts a discussion on contingent charging structures (ie where an adviser only receives payment, or receives a higher payment only when a transfer takes place), where it clearly has concerns (as do others).  However, as the FCA is worried that any cure may be worse than the disease it does not put forward any specific proposals.

Consultation on these proposals closes on 25 May 2018.


The FCA has taken one step forward with its finalised rules, but clearly there is more work to be done if the desired policy outcome of a significant shift in the quality of pension transfer advice across the whole advisory market is to be delivered.

Those not familiar with the regulatory regime that the FCA has been operating for a number of years will wonder why the proposals it is making now, and the tentative discussion on contingent charging that it is now broaching, had not been resolved years ago.  In the meantime, some trustees and employers will no doubt wish to explore making available to members a specialist IFA whose practices are already aligned with the FCA’s preferred approach, to mitigate the risk that members find their own IFA whose practices are less than satisfactory.

Government proposes changes to insolvency and corporate governance law

Last week the Department for Business, Energy & Industrial Strategy launched a consultation designed to improve the UK’s corporate governance framework, picking up on concerns that, in a small number of recent corporate governance failures, company directors have unfairly shielded themselves from the effects of insolvency and – in the worst cases – profited from business failures while workers and small suppliers lost out.

Amongst the proposals are the following:

  • Holding to account the directors of holding companies if they conduct a sale which harms the interests of the subsidiary’s stakeholders (such as its employees and creditors (which would include a DB pension scheme) – where that harm could have been reasonably foreseen at the time of the sale.  In such a situation the director may be ordered to contribute a sum that the court thinks fit towards the subsidiary’s creditors.  The director would also be liable to be disqualified
  • Seeing whether any improvements can be made to the legal and technical framework within which distributable profits are distributed – following concerns about some large companies continuing to pay out large dividends in the period immediately before their insolvency

Consultation closes on 11 June 2018.


It does seem that the proposal to hold directors to account when they sell a struggling company has come as a direct result of the BHS affair (the quoted example involving a disposal from Alpha to Gamma looks remarkably close to what actually happened in BHS).  Taken with the White Paper proposals last week, directors will have to consider the impact on the pension scheme before agreeing to the sale.

From a pensions point of view it is perhaps disappointing that the consultation misses the opportunity to explicitly address “pre-pack” administrations where viable businesses are sold off, leaving the pension scheme in the PPF lurch.  Perhaps the view in government is that the Pensions Regulator’s moral hazard powers are the most appropriate way to deal with transactions of this type?  If so it is not apparent whether or not pre-packs designed to avoid pensions debt have been considered at all as part of this consultation exercise.

NEST contractual enrolment to go ahead but decision on discretionary death benefits delayed

The National Employment Savings Trust has published its response to its consultation last year (see Pensions Bulletin 2017/47) about proposed changes to its Rules.  NEST intends to proceed with most of its proposals, including:

  • Allowing for contractual enrolment into NEST – which will put NEST on a level playing field with other occupational pension schemes; and
  • Giving the NEST Trustee the ability to cease the participation of “dormant” employers who have not contributed to NEST for a specified period of time, by giving notice to the employers

Although these rule changes will come into effect from 6 April 2018, NEST will be offering contractual enrolment from 25 May 2018 when the organisation’s Employer Terms and Conditions are updated.

However, in the light of criticism on its proposals to give members the option going forward of completing a discretionary form or a binding form regarding death benefits, and hence affecting the inheritance tax position, NEST has decided to “continue to explore the feasibility of our proposed approach on death benefits and discretion, along with other options that have been suggested during this consultation, including applying discretion to all, with a view to making an appropriate rule change early next year”.


The bulk of the criticism about the proposed changes to death benefits seems to focus on the communication challenges that would be presented by offering members two choices effectively about the tax treatment of their death benefits.  We continue to believe that NEST’s proposals were sensible and hope it can come up with a way forward to solve the perceived communication issues.

No change on the advice requirement for overseas transfers

The DWP has concluded that there should be no change to the advice requirement to allow for the difficulties encountered by those seeking to transfer their “safeguarded benefits” overseas.  This is because “the gains provided in consumer protection outweigh the issues faced by some members with delays in the overseas transfer advice process”.

In publishing its response to a consultation launched in September 2016 (see Pensions Bulletin 2016/40), the DWP notes two developments since then:

  • The new tax charge for transfers to qualifying recognised overseas pension schemes (QROPS) which the DWP states is likely to reduce the number of transfers to a third country (ie neither the UK nor the member’s country of residence) – such transfers have been associated with scams; and
  • The FCA’s updated rules for DB pension transfer advice (see article above), which amongst other things make reference to overseas transfers

There were 52 responses to the consultation, with the vast majority welcoming the protection given by the current advice requirement, and many pointing out a number of difficulties should the Government proceed with the ideas it floated.  And as noone submitted evidence that the advice requirement was “actively preventing overseas residents from transferring their safeguarded pensions”, the DWP concluded that the advice requirement is “largely working and does not require an easement”.


At the time we thought that it would be unlikely that the DWP would be able to find any adjustment to the current regulatory regime, and so it has proved.

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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