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Supervision of Master Trusts and Enforcement Policy Consultation From the Pension Regulator

Last updated: Wednesday August 15th 2018

On 26 July 2018 the Pensions Regulator (TPR) published a draft policy for consultation on the future monitoring of pension trusts. This came shortly after a slightly amended draft Code of Practice 15 (the CoP15) for the authorisation of master trusts was laid before Parliament.

The key planks are the six months window from 1 October 2018 to 31 March 2019 to be authorised in order to continue to operate; followed by a risk-based supervision. These come about from the Pension Schemes Act 2017 (the 2017 Act) and Occupational Pension Schemes (Master Trusts) Regulations 2018 (the Regulations) which introduced authorisation and supervision of master trusts by TPR; and draws upon the CoP15 and the existing Code of Practice 13: Governance and administration of occupational trust-based schemes providing money purchase benefits (July 2016).

Consultation: Supervision and enforcement policy for master trusts

The consultation wants views on the proposed risk-based approach to supervision, the routine and additional supervisory approaches set out in the policy, and how clear enforcement action (including withdrawing authorisation) is set out.

Supervision will require routine submissions and additional information from which additional supervision may be sought should there be a perceived increased risk profile. TPR’s 5 principles for supervision are stated as: ‘engaged and responsive, proactive and forward looking, strategic and targeted, proportionate and risk-based, and consistent’.

The key areas to satisfy TPR are:

  • individuals involved in running a master trust continue to meet the standards of honesty, integrity, financial soundness, competence and conduct appropriate to their role
  • the systems and processes for running the master trust are efficient, robust and contribute to the effective running and governance of the master trust
  • there is sufficient continuity planning in place, so members will be protected where the risk of a master trust failure is increased, for example in the case of a triggering event
  • any scheme funder continues to be able to financially support the master trust, and
  • the master trust has access to a prudent level of finance to enable it to operate on a day-to-day basis and to cover the costs arising from a triggering event.

TPR will take into account strategic and operational risks for master trusts such as:

  • external factors impacting master trusts, eg the socio-economic environment, political and legal environment and competitive landscape
  • quality of management and governance
  • the business model and strategy
  • financial sustainability
  • systems and processes
  • information technology and infrastructure
  • control functions, eg risk management and internal audit
  • member and employer experience, eg complaints received

Supervision

A supervisory return may be requested by TPR in addition to the regular Scheme return, Scheme report and accounts and Scheme funder accounts, and any event notifications. The requirements of the supervisory return are to be given at later date by TPR.

Specific information requests from TPR may also include trustee board minutes, investment reports, administration reports, chair statements and other documents.

There will be varying levels of supervision for each master trust. New master trusts can expect higher levels of supervision with a named supervisor and face-to-face meetings and calls.

Enforcement

Extract p17 of 27 TPR Master Trust Supervision and Enforcement Policy (July 2018)

Enforcement begins with voluntary dialogue and request of information under s72 of the Pension Schemes Act 2004 (the 2004 Act). Fixed penalty notices (FPN) of £500 can be issued under s17 of the (2017 Act. Where information has not been provided adequately after a statutory request an escalating penalty notice (EPN) can be issued under s18 of the 2017 Act. These escalate at £1,000 a day so that Day 10 would be a daily rate of £10,000. After that each subsequent day is £10,000.

The total amount payable is the total of the daily rate for that day and any unpaid penalties due in respect of previous days at the relevant daily rates.

For example, the total bill for Day 11 would be penalties of £65,000 being £55,000 for the combined Days 1- 10 and £10,000 for Day 11).

Extract p19 of 27 TPR Master Trust Supervision and Enforcement Policy (July 2018)

Criminal prosecution can be made if a person neglects or refuses to comply with the information request of alters, hides or destroys a document requested under s72 of the 2004 Act. (The TPR prosecution policy can be found at http://www.thepensionsregulator.gov.uk/docs/prosecution-policy.pdf).

 

Breaches of law, whistleblowing and other enforcement powers

Whistleblowing is a requirement for trustees, auditors, actuaries and others under s70 of the 2004 Act where there is a breach of law considered to be of material significance.

The 2017 Act ( http://www.legislation.gov.uk/ukpga/2017/17/contents/enacted ) extended  breaches of law for master trusts and the requirement to report them to the scheme funder and scheme strategist. Section 16 of the 2017 Act states where a person such as a trustee ‘becomes aware of the fact that a significant event has occurred in relation to an authorised Master Trust scheme, the person must give notice of that fact, in writing, to the Pensions Regulator as soon as reasonably practicable. TPR give an explanation of what a significant event may be in its Code of Practice 15 #373-380 pp87-88. These include a change to the statement of investment principles.

Any breach of law should be reported per the TPR Code of Practice no. 1 and accompanying guidance ( http://www.thepensionsregulator.gov.uk/codes/code-reporting-breaches.aspx )

Additional enforcement powers, not specifically restricted to master trusts are TPR’s ability to:

  • issue an improvement notice where systems are processes have fallen below expected standards
  • direct intervention imposed on a third party that has contributed materially to a failure to meet a legal requirement
  • appointment of an independent trustee

Pause orders and publication of reports

Pause orders may be used by TPR during a triggering event, to safeguard member interests or while a master trust is awaiting a decision on authorisation. These pause orders can limit a master trusts range of activity for up to three months. Further extensions beyond the three months are permissible.

Directions in a pause order could be:

  • preventing new members (or specified classes of members) joining
  • stopping the receipt of contributions or payments to the scheme by or on behalf of members, or ceasing the payment of any (or specified) benefits
  • refunding contributions or deductions from earnings; and
  • stopping any transfers, transfer payments or other steps to discharge any liability of the scheme.

Reports on specific schemes and cases may be published from time to time to raise awareness of the risks to the good governance and administration of schemes.

Withdrawal of authorisation

The decision to withdraw authorisation will consider:

  • frequency and actual or potential impact of master trusts’ failures to meet their obligations, and the authorisation criteria
  • the risk of master trusts not being able to continue to meet their obligations
  • the intention and behaviour of those involved in running the master trust, including the transparency of master trusts and any remedial action already taken (and any relevant third parties)
  • the actual or potential detriment to members, and
  • the circumstances of the wider market.

Withdrawal can happen where the master trust frequently fails to meet the authorisation criteria and/or the impact of any failures are a significant detriment to members. The decision to withdraw authorisation from a master trust is taken by the Determinations Panel.

There are two ways in which authorisation of a master trust can be withdrawn:

  • Under the standard procedure, including the issue of a warning notice, or
  • Under the special procedure, where a quick decision is needed to protect members

The persons directly affected by the decision would not be informed of the procedure until after the Determinations Panel makes a determination and issues a Determination Notice and Order, if appropriate. This is followed by a Compulsory Review of the determination, involving the directly affected persons. The Determinations Panel then makes a final determination in a Final Notice. The special procedure can only be used if certain statutory criteria are met. We anticipate that, in most cases, the standard procedure will apply where we seek to withdraw authorisation, though there may be some cases where the special procedure is used. Both processes allow for the decision of the Determination Panel to be appealed.

The process for challenging a determination and making a reference to the Tribunal can be found at http://www.thepensionsregulator.gov.uk/procedures .

Triggering events are created by either the Warning Notice under the standard procedure or the Determination Panel’s Determination Notice under the special procedure.

Policy and Consultation deadline

The policy is available at http://www.thepensionsregulator.gov.uk/docs/draft-master-trust-supervision-policy-july-2018.pdf

The consultation is to Tuesday 23 August 2018 12noon and can be found at http://www.thepensionsregulator.gov.uk/docs/master-trust-supervision-policy-consultation-july-2018.pdf

If you require any assistance please contact Andrew Riley Director of Assurance on 020 7112 8300 alternatively you can email andrew.riley@assureuk.co.uk.