Master trusts: greater protection for members

United Kingdom

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

The Pension Schemes Bill 2016 – published on 20 October – includes new regulatory requirements for master trusts. These provisions, which cover authorisation, supervision and winding up, have come about largely because of Government and Pensions Regulator concern to protect member benefits if a master trust were to fail.  

The new rules will apply both to newly established master trusts and to existing schemes. Some of the protections for existing schemes, as drafted, will be backdated and could apply to events taking place from 20 October 2016.

The provisions are extremely complex – with much more to come in regulations. Here are the edited highlights.

What is a master trust? 

A master trust is defined as an occupational pension scheme which:

  • provides money purchase benefits (whether alone or in conjunction with other benefits);
  • is used, or intended to be used, by two or more employers; and
  • is not used, or intended to be used, only by employers that are connected with each other. 

Where benefits other than money purchase benefits are provided, then the new provisions only apply to the money purchase benefits.

This definition may catch a number of schemes for non-associated employers with money purchase sections or benefits which would not generally regard themselves as being master trusts. This issue may well be picked up during the passage of the Bill or in secondary legislation.  


The trustees must apply to the Regulator for authorisation. The application must include: 

  • the scheme’s latest accounts;
  • the latest accounts of each 'scheme funder';
  • the scheme’s business plan; and
  • the scheme’s continuity strategy.

The scheme funder means a person who is liable to provide funds to the scheme where charges received from members are insufficient to cover establishment and running costs, or is entitled to receive profits from the scheme where charges exceed costs. It must be an entity whose only activities relate directly to the master trust (i.e. each scheme funder can only operate one master trust).

The Regulator has a six-month period in which to consider an application. It must be satisfied that the scheme meets the five authorisation criteria.

 The five authorisation criteria
  1. The persons involved in the scheme are fit and proper.
  2. The scheme is financially sustainable.
  3. Each scheme funder meets the statutory requirement (body corporate or partnership whose only activities relate to the master trust);
  4. The systems and processes used in running the scheme are sufficient to ensure that it is run effectively.
  5. The scheme has an adequate continuity strategy.

Those who must meet the fit and proper test include: 

  • the person establishing the scheme;
  • the trustees;
  • anyone who has power to appoint or remove a trustee or to vary the terms of the scheme;
  • a scheme funder; and
  • a scheme strategist (see below).  

The Regulator may also assess the fitness of any person who promotes or markets the scheme and may consider matters related to persons connected to those listed above when considering if someone is fit and proper.

In order for the financial sustainability test to be met, the Regulator must be satisfied that the scheme's business strategy is sound and the scheme has sufficient financial resources to meet the costs of setting up and running the scheme and complying with the continuity requirements on the happening of a triggering event (outlined below). Essentially this means sufficient resources to administer and wind up the scheme over a period of between six and 24 months (as approved by the Regulator). Details of matters the Regulator should take into account when considering financial sustainability are to be set out in regulations.

Each master trust must have a scheme strategist to prepare, and review annually, a business plan. The business plan must be approved by the scheme funder and the trustees. A scheme strategist is defined as a person who is 'responsible for making business decisions relating to the commercial activities of the scheme'.

Regulations will set out matters the Regulator should consider when deciding whether adequate systems and processes are in place – this may include detailed requirements for IT systems as well as:

  • risk management;
  • resource planning;
  • processes relating to transactions and investment decisions;
  • processes relating to the appointment and removal of trustees, and their professional development; and
  • processes relating to the roles and responsibilities of a scheme strategist and a scheme funder.

A continuity strategy is a document prepared by a scheme strategist addressing how the interest of members are to be met if a triggering event (see below) occurs. The continuity strategy must include the level of administration charges that apply to members and must be approved by the scheme funder and the trustees.   

Ongoing supervision 

Trustees must send the Regulator annual scheme accounts and the scheme funder must submit its own accounts annually. The Regulator can also require submission of an annual supervisory return. 

The Regulator must be notified of significant events (to be listed in regulations) by a long list of persons involved in the master trust, including anyone providing legal advice (subject to legal professional privilege) or administration services.

If the Regulator stops being satisfied that an authorised master trust scheme meets the five authorisation criteria, it may decide to withdraw the scheme’s authorisation. 

Triggering events, continuity and winding up 

When a triggering event occurs the trustees must comply with the:

  • notification requirements;
  • continuity options; and
  • implementation strategy. 
Triggering events
  • The Regulator issues a warning notice or determination notice in respect of a decision to withdraw authorisation.
  • The Regulator gives notification that the scheme is not authorised.
  • An insolvency event occurs in relation to a scheme funder.
  • A scheme funder decides to end, or does end, its relationship with the scheme.  
  • A scheme funder, scheme strategist or the trustees decide that the scheme should be wound up.
  • An event occurs which results in the winding up of the scheme under its rules.
  • The trustees decide that the scheme is at risk of failure and so it is necessary for one of the continuity options to be pursued.

Crucially, for existing master trusts, the transitional provisions as drafted will apply to triggering events occurring on and from 20 October 2016. 

New employers cannot be admitted following a trigger event, neither can new administration charges be imposed on members.

The Regulator and employers must be notified on the happening of specified trigger events (or on a specified person becoming aware of a trigger event).

If a trigger event occurs, trustees must pursue continuity option 1 or continuity option 2. In most cases the trustees can decide which option.

Continuity option 1 – all accrued rights are transferred out and the scheme is wound up. Details are to be confirmed in regulations. These will include provisions allowing members or employers to opt out of a transfer, communication and notification requirements, requirements for the transferee scheme and reporting to the Regulator on administration charges. A master trust can only be wound up in accordance with continuity option 1.

Continuity option 2 – resolving the triggering event.  The trustees must attempt to resolve the triggering event and notify the Regulator when they consider they have done so. The Regulator must then decide if it is satisfied that the triggering event has been resolved.    

Whichever continuity option is chosen, the trustees must generally submit an implementation strategy for approval by the Regulator setting out how members’ interests are to be protected.  It must include levels of administration charges for members and other information as prescribed.

Transitional provisions for existing master trusts

Existing schemes have will six months from the commencement date of the new legislation to apply for authorisation.  

If a triggering event occurs on or after 20 October 2016 then it will be notifiable to the Regulator within seven days of the legislation coming into force. Certain restrictions are also imposed on schemes once a triggering event occurs on or after 20 October 2016 (including a prohibition on increasing administrative charges imposed on members). 

Where winding up is triggered in an existing scheme on or after 20 October 2016 but before the scheme is authorised, then the scheme funder is liable for the costs (if they do not lie elsewhere). Essentially the scheme funder will be liable for the costs of transfer and winding up other than those administrative costs which are already borne by members.

It is fairly unusual for legislation to apply retrospectively and there must be some question as to how these transitional provisions will work in practice in relation to periods before they actually come into force. However, current master trusts should be aware of them and, if any of the proposed trigger events occur, they should keep records of any steps taken in relation to winding up and (in particular) any charges which fall on members.