Occupational Pension Schemes (Master Trusts) Regulations 2018 – Sackers’ response to consultation

Background

The DWP is seeking views on the draft regulations that will fully commence the new authorisation and supervisory regime for Master Trust schemes under the provisions of the Pension Schemes Act 2017 (“the 2017 Act”).

In this response

• General comments

General Comments

Application of the Pension Schemes Act 2017 to mixed benefit schemes

• AVCs

We welcome the decision to exclude from the scope of the new requirements any DB schemes whose only DC benefits are additional voluntary contributions (AVCs). However, it is not clear why the exclusion is restricted to AVCs which were contributed while the member was an active member (draft regulation 26(4)(a)). DB schemes may also allow deferred members to continue to contribute AVCs, for example, where such members have reached the old Inland Revenue limits on pensionable service. It would therefore be helpful to extend the exclusion in the regulations to include AVCs contributed by non-active members.

• Transfers-in

We also welcome the decision to exclude from the scope of the new requirements any DB schemes whose only DC benefits were transferred in from other pension schemes. However, it is not clear why the exclusion is restricted to transfers made while the member was an active member of the receiving scheme (draft regulation 26(4)(b). It is common for bulk transfers to include benefits relating to deferred members as well as active members, and it is not immediately obvious why a transfer in of a deferred member’s benefits should create a “master trust” for the purposes of the 2017 Act and why a transfer in of an active member’s benefits should not. (It may be that the intention is to capture schemes offering decumulation services, but the current wording would extend beyond that to ordinary schemes.)

• Scheme funder

Draft regulation 27 disapplies some of the authorisation / supervision criteria for mixed benefit schemes where the only scheme funders are participating employers. However, we are aware of at least one scheme that provides only DC benefits, and where the only scheme funders under the Pensions Act 2017 would be its participating employers. We would therefore query why the exclusion has been expressed so that it only covers mixed benefit schemes. (It may be that the intention is to capture mixed benefit schemes because they have, in theory, flexibility to access other scheme assets to ensure financial sustainability. However, the existence of a DB section within a scheme does not necessarily mean that the DC section will be able to benefit from cross-subsidy of DB assets because it may be a sectionalised mixed benefit scheme. Also in a pure DC scheme there can still be access to other scheme assets, for example, in a reserve account.)

Further details of the financial sustainability requirement that would apply where there is no scheme funder would also be helpful to some master trust trustees.

Existing schemes which intend to apply for authorisation

• Code of Practice

We understand that some key details of the authorisation and supervision regime will be set out in TPR’s code of practice which is due to be published for consultation in Spring 2018. This could make it more difficult for existing schemes to assess the potential impact of the new regime and make decisions about their future, as they do not yet have a complete picture of what may be required of them. We are also concerned at the short amount of time that existing schemes will have to prepare for the authorisation and supervision process before October 2018, particularly given the timing of the code of practice consultation and the volume of material that some schemes will need to assemble. If key details of what is expected in the code could be released beforehand, that would be very helpful.

• Governance

We would hope that, in setting the commencement date for the authorisation regime, the DWP and TPR have considered how TPR will liaise with existing schemes about their application in order for them to achieve authorisation. We understand there will be a process of checking the “readiness” of schemes to apply, but would welcome clarification of how much support schemes will receive from TPR in preparing and submitting their applications.

We would also welcome further details about how and when confirmation of authorisation status will be published (particularly as regards commercial master trusts who would hope for a single announcement to be made).

Also, neither the Pensions Schemes Act 2017 nor the draft regulations contain transitional provisions to explain what will happen during the period between the date an existing scheme makes an application to TPR for authorisation and the date such authorisation is received. For example, it is not clear what would be expected of such a scheme if authorisation were to be declined, pending an appeal.

Existing schemes which intend to exit the market

• Exit requirements

Neither the Pensions Schemes Act 2017 nor the draft regulations set out practical details (in relation to the bulk transfer out of existing members) of how an existing scheme is expected to exit the market. We would welcome clarification as to whether TPR will expect such schemes to comply with the new legislation which is due to come into force in April 2018 regarding the bulk transfer of DC members and what support TPR would be permitted to offer with regard to the process of finding a suitable recipient scheme for transferring members. (The impact of many small schemes exiting the market during the same period could be significant, and could put pressure on receiving schemes at a time when they are busy dealing with their own authorisation applications.)

• Winding up

In the absence of the code of practice, existing schemes that do not intend to seek authorisation would welcome clarification of any steps that TPR expects such schemes to take now, in terms of winding up timescales and communications with employers / members.

Interaction with other legislation / scheme rules

• Governance requirements

In the absence of the code of practice, it is not clear whether the Pension Schemes Act 2017 and the requirements of its underlying regulations will take precedence over other legal requirements, such as the Pension Schemes Act 1993 and the Occupational Pension Schemes (Preservation of Benefit) Regulations 1991. Also, it is not currently clear how some requirements of the Occupational Pension Schemes (Charges and Governance) Regulations 2015 might interact with the Pension Schemes Act 2017, for example, how the criteria for the selection of non-affiliated trustees (from the 2015 Regulations) would operate alongside the fit and proper persons test (from the 2017 Act).  We anticipate that these issues could be covered in the code of practice in due course, but without sight of the draft code this remains unknown for the time being.

Occurrence of “significant” events

• Meaning

Throughout the draft regulations, actions are prompted by the occurrence of “significant” events. For example, persons listed in section 16(2) of the Pension Schemes Act 2017 are required to notify TPR when there is a “significant” change to the statement of investment principles and when there is a “significant” change that requires revision of the business plan (draft regulations 14(c) and (d)). It would be helpful if the meaning of “significant” could be clarified by TPR in either the code of practice or related guidance.

• Reporting and timescales

The timescales for notifications and the submission of information are generally short and may be difficult for schemes to meet. We also note that no provision has been made for the fact that the trustees (or other relevant person) may not immediately become aware that a significant event has occurred, meaning their timeframe for responding would be decreased further. We would suggest including an alternative timescale which is linked to awareness / when a person ought reasonably to have known an event had occurred in order to provide some practicality in this respect.