By guest editor Anne-Marie Winton, partner at ARC Pensions Law LLP.
Employers who use a master trust to provide pensions savings for their employees (often for automatic enrolment purposes) could get a nasty surprise on 1 April 2019, because that is the deadline by which all master trusts have to apply for authorisation from the Pensions Regulator. Those that do not apply, or apply but do not successfully jump through all the hoops needed to get authorisation, will have to exit the market. This means that some employers will need to find a new pension scheme for future contributions, possibly with insufficient notice to consult with affected employees in advance of the change of scheme. To date around one-third of the existing master trusts in the market have decided to cease to operate and more are expected to follow before April next year.
So why has this risk arisen?
The reason for some master trusts ceasing to operate is because of legislation introduced in 2017, which came into force on 1 October 2018, which set out the basis for an occupational pension scheme to be defined as a master trust. That legislation also set out some pretty tough criteria for authorisation by the Pensions Regulator. In particular a master trust must have sufficient financial resources to meet its set up and running costs and have a continuity strategy in place to protect its members if it winds up; and as part of the authorisation process a business plan must be provided to the Pensions Regulator for review. This has put a level of scrutiny on some existing schemes that they are not equipped to address.
Will employers always know if they are using a master trust?
Not necessarily. Master trusts do not have to describe themselves as such in the scheme name, but if an employer is participating in a workplace pension scheme that provides money purchase benefits and is used, or intended to be used, by two or more employers who are not connected with each other, then this is likely to be a master trust. Schemes described as group personal pension plans are not master trusts. Some employers chose a master trust, rather than a GPPP, to use as their qualifying pension scheme for automatic enrolment purposes.
How will employers know if their master trust is no longer authorised?
Ideally master trusts which do not get authorisation should inform their client base as soon as they know this. But in any event, the Pensions Regulator will be publishing and maintaining a list of authorised master trusts, starting with the first batch of schemes receiving authorisation. This list will replace the list of schemes with voluntary master trust “assurance” that had previously been published on its website.
What will happen to master trusts after 1 April 2019 that are not authorised? And what will employers have to do as a result?
Unauthorised master trusts will need to cease to operate and will have to wind up the scheme and find a new home for the members’ money purchase pots by transferring them to a willing new scheme (assuming one can be found).
Employers who use a master trust that winds up will need to find a new pension provider for the future, such as a newly authorised master trust or a group personal pension. And for employers with more than 50 employees, pensions regulations require a period of at least 60 days of prior consultation by the employer with affected employees before a decision is made to switch to a new scheme. So, depending on how much notice employers get of the failure of their chosen master trust to get authorisation, this could mean some challenges from a timing perspective. And as part of the consultation, it is possible that employees will complain to their employer for choosing a “bad” provider initially (even if they have not suffered any loss as a result). Therefore clear communication with employees, both during the consultation and afterwards, will be key to make sure the right message is portrayed and that employees remain reassured about the safety of their pension benefits.
Employers who are in any doubt as to whether or not they are participating in a master trust should ask their pension provider to confirm this and, if a master trust is being used, also ask whether or not the provider is intending to seek authorisation. This will give employers a chance to put in place timely contingency plans including, if necessary, the search for an alternative provider for future contributions and a safe home for members’ money purchase pots built up to date.