The Pension Schemes Bill

Following the Queen’s Speech on 18 May 2016 the Government announced that new legislation was proposed to regulate further occupational pension schemes. The bill containing the draft legislation was duly laid before the House of Lords on 19 October, and the bill received its second reading on 01 November. The bill now moves to the committee stage in the House of Lords.

It is worth looking at the speech of Lord Freud, the Minister of State at the Department for Work and Pensions, who introduced the Bill to the House of Lords:

“Automatic enrolment means that more people are saving into a private pension. The new freedoms mean they have more choice about what they do with their savings than ever before. We need to ensure that the legislative framework is appropriate in the light of these developments. The measures in the Bill will help to protect savers and maintain their confidence in pension savings.

The majority of the Bill focuses on master trust occupational pension schemes, which have become a most popular vehicle into which workers are automatically enrolled, particularly among small and micro-employers. Although these schemes can offer great value for members and employers, we need to act now to make sure they are regulated in the right way.

The schemes are regulated by the Pensions Regulator and occupational pension legislation. However, that legislation was developed mainly with single-employer pension schemes in mind. Master trust schemes have different structures and dynamics, so the Bill introduces a new authorisation regime for them and new powers for the Pensions Regulator to intervene where schemes are at risk of failing.

Master trusts will now have to satisfy the regulator that they meet certain criteria before operating, and schemes must continue to meet the criteria to remain authorised. The criteria respond to specific key risks identified in master trust schemes. They were developed in discussion with the industry and include the kinds of risks that the Financial Conduct Authority regulation addresses in group personal pensions, with which master trust schemes have some similarities.

Trusts will now be required to demonstrate that the persons involved in the scheme are fit and proper, that the scheme is financially sustainable, that the scheme funder meets certain requirements, that the systems and processes relating to the governance and administration of the scheme are sufficient to ensure its effective running, and that the scheme has an adequate continuity strategy.

The Bill covers more detail on each of these criteria, and additional details will be set out in regulations following further consultation with the industry. The authorisation and supervision regime is likely to be commenced in full in 2018. However, the Bill also contains provisions which, on enactment, will have effect back to the day on which this Bill was published, 20 October 2016.

These provisions relate to requirements to notify key events to the Pensions Regulator and constraints on charges levied on, or in respect of, members in circumstances related to key risk events or scheme failure. This is vital for protecting members in the short term and will ensure a backstop is in place until the full regime commences.

We have worked closely with the Pensions Regulator and engaged with the pension industry to see what essential protections are needed, and we believe that the measures in the Bill will provide those protections. The Pensions Regulator, along with many pension providers, has welcomed the introduction of the Bill and these measures, saying that it,

“will drive up standards and give us tough new supervisory powers … ensuring members are better protected and ultimately receive the benefits they expect”.

The Bill will also make a necessary change in relation to the existing legislation on charges. Information gathered by the Financial Conduct Authority and the Pensions Regulator indicates that a significant number of people have pensions in respect of which an early exit charge is applied. Clause 40 will give us the power to override contractual terms which conflict with the regulations. For example, the Government intend to use this, alongside existing powers, to make regulations to introduce a cap that will prevent early exit charges creating a barrier for members of occupational pension schemes wanting to access their pension savings. The FCA is introducing a corresponding cap on early exit charges in personal and stakeholder pension schemes.

The Government also intend to use this power, together with existing legislation, to make regulations preventing commission charges being imposed on members of certain occupational pension schemes where these arise under existing contracts entered into before 6 April 2016. We have already made regulations that prohibit such charges under new contracts agreed after that date. This will fulfil our commitment to ensure that certain pension schemes used for automatic enrolment do not contain member-borne commission payments to advisers. The Government intend to consult on both sets of regulations in the new year.”

Summary of the Bill:

Clause 1 defines “Master Trusts” as being a money purchase occupational pension scheme used, or intended to be used by two or more employers who are not connected to each other. It will catch all occupational pension schemes set up for the purposes of auto-enrolment, and all schemes where members have a variety of employers.

Clause 3 prohibits a person from operating a Master Trust unless the scheme is authorised. Serious financial penalties can be imposed for a breach of this provision. A person is said to be operating a scheme if they accept fees charges or contributions in relation to the scheme, or have entered into an agreement with an employer which relates to the provision of pension savings for employees.

Clause 4 provides that the trustees of a Master Trust may apply to the Pensions Regulator for authorisation. The form of application is delegated to the Pensions Regulator, and regulations may be made dealing with the procedural detail.

Clause 5 details the authorisation criteria that must be considered by the Pensions Regulator. The criteria are:

(a) that the persons involved in the scheme are fit and proper persons,
(b) that the scheme is financially sustainable,
(c) that each scheme funder meets the requirements set out in the bill;
(d) that the systems and processes used in running the scheme are sufficient to ensure that it is run effectively, and
(e) that the scheme has an adequate continuity strategy.

The Regulator has six months from receipt of an application for authorisation to give his decision. There is a right of appeal if authorisation is refused (Clause 6).

Clause 7 deals with the concept of “fit and proper”. The Regulator is required to assess whether each of the following in relation to a scheme is fit and proper:

(a) a person who establishes the scheme;
(b) a trustee;
(c) a person who (alone or with others) has power to appoint or remove a trustee;
(d) a person who (alone or with others) has power to vary the terms of the trust under which the scheme is established (where the scheme is established under a trust);
(e) a person who (alone or with others) has power to vary the scheme (where the scheme is not established under a trust);
(f) a scheme funder;
(g) a scheme strategist; and
(h) such other persons as may be provided for in regulations.

For most occupational schemes this will mean that as a minimum the principle employer, the trustees, and the administrator will be assessed. Clause 7 also provides that anyone who markets or promotes the scheme will have to pass the fit and proper test.

The clause provides that regulations may be made setting out matters to be taken into account when considering if a person is fit and proper. The Regulator may also consider persons connected with a person when assessing if they are fit and proper.

Clause 8 deals with the financial sustainability of the scheme. The Regulator must be satisfied that the business strategy relating to the scheme is sound and that the scheme has sufficient financial resources to meet the costs if a triggering event occurs (see below) and the costs of running the scheme for between six months and two years (the period will be as determined by the Regulator for each scheme).

Clause 9 requires a scheme strategist to prepare a business plan for the scheme and to review (and revise if appropriate) the plan at least every 12 months. The business plan and revisions to it must be supplied to the Regulator.

Clause 10 deals with the scheme funder, who must be a separate legal entity from the other parties involved with the scheme. Normally the scheme funder will be the principal employer. Regulations may be made relating to the scheme funder’s accounts.

Clause 11 deals with the requirement that the systems and processes used in running the scheme are sufficient to ensure that it is run effectively. The clause provides for regulations to be made about the systems and processes used in running a scheme.

Clause 12 provides that a scheme strategist must prepare a contingency plan (which the Regulator will assess for adequacy) which must address how the interests of members are to be protected if a triggering event (see below) in relation to the scheme occurs. The continuity strategy must set out the levels of charges that apply in relation to members of the scheme, in such manner as is specified in regulations. The continuity strategy must be kept under review (and revised if appropriate). The continuity strategy and revisions to it must be supplied to the Regulator.

Clause 14 requires that the scheme must send its annual accounts to the Regulator no later than 9 months after its year end.

Clause 15 provides for the completion and filing with the Regulator of a supervisory return. Further detail on the return will be contained in regulations.

Clause 16 requires that if anyone connected with the scheme (and the list includes professional advisers to the scheme) becomes aware of any matter to be detailed in regulations they must report the matter to the Regulator in writing as soon as reasonably practicable. One can assume that the regulations will include insolvency events amongst other matters.

Clause 17 and clause 18 make provision for financial penalties to be levied against anyone who fails to comply with requests for information from the Regulator under section 72 of the Pensions Act 2004. The penalties are substantial.

Clause 19 deals with the withdrawal of authorisation if the Regulator ceases to be satisfied that the scheme meets the authorisation criteria.

Clauses 20 to 30 deal with what are termed “triggering events”. Essentially they are events which may put the savings of members at risk; all insolvency events in relation to persons connected with the scheme are triggering events.

Unless the triggering event can be resolved (under the supervision o the Regulator) the trustees of the scheme have a duty of the occurrence of a triggering event to transfer all member funds to another authorised master trust scheme or schemes and to wind up the scheme forthwith. No further contributions or transfers in can be accepted after a triggering event occurs. Regulations may be made to deal with the detail of how the triggering regime will work.

Clause 31 permits the Regulator at any time after a triggering event has occurred to make a “Pause” order; effectively this gives the Regulator the right to intervene in the scheme to protect member funds, and allows the Regulator to give directions as to how the scheme is to be operated whilst the pause order is in force.

Clause 32 prohibits the scheme from accepting new employers after a triggering event has occurred. Clause 33 prohibits any increase in charges after a triggering event.

Clause 36 provides for transitional provisions for Master Trusts in operation on the date on which Clause 3 comes into force. It should be noted that existing schemes will have six months from the date on which the requirement for authorisation comes into force to make application for authorisation; provided they comply with this requirement they can continue to operate. However, if a triggering event occurs at any time after 20 October 2016 the reporting requirements to the Pensions Regulator apply; these provisions will have retrospective effect and all schemes need to consider how that are affected. I would be pleased to advise in more detail on this aspect.

Nick Davenport

Partner