Could mastertrust consolidation result in stranded schemes?

The Pensions Regulator published its code of practice for mastertrusts on Wednesday, which sets out details behind its new remit, introduced by legislation last year.

Key to the code is the requirement that authorised schemes must demonstrate an acceptable continuity strategy, detailing what course of action trustees would take if the scheme or commercial backer runs into trouble.

They could actually precipitate the problem that they are trying to avoid

Richard Butcher, PTL

They must explain how they would choose between securing the benefits in another mastertrust, known as “continuity option one” and resolving it without winding up, referred to as “continuity option two”.

The first option requires “ensuring adequate resources” to facilitate the transfer to another scheme, which according to some industry figures will require capital that small trusts with weak backers simply do not have.

“That’s around having adequate capital reserves in case things fail,” said Richard Butcher, managing director at trustee company PTL. “It’s really the smaller ones where it’s going to be a more difficult one to ensure, and I think there the regulator is going to look at each business in turn.”

Weeding out the weak

Of course, the whole point of the mastertrust authorisation regime, brought in by the Pension Schemes Act 2017, was to weed out those mastertrusts that are not well funded enough to secure an orderly exit from the market.

But the regime’s introduction years after a boom in mastertrusts being set up means some may already lack these means, and may have to exit the market with little interest from potential buyers.

“This is a risk that we pointed out to the then [pensions] minister Baroness Altmann at the time, that they could actually precipitate the problem that they are trying to avoid,” said Butcher.

No evidence yet

According to the regulator, early signs from the consolidation taking place in the market are positive, with no unsaleable schemes yet coming to its attention.

A spokesperson for the Pensions Regulator, said: "All the evidence we are seeing is that there is a healthy consolidation market from a wide range of mastertrusts who are actively taking on mastertrusts which are choosing to exit before authorisation commences."

Generally speaking, if schemes fail to demonstrate that they can continue to meet the authorisation criteria, this could result in deauthorisation.

"Every situation will be taken on a case-by-case basis, taking into account a number of factors and would depend on the circumstances of the scheme, the behaviour of those controlling the scheme and the speed with which the problem has been identified and can be rectified," the spokesperson said.

The spokesperson added that the regulator's forthcoming Supervision and Enforcement policy, due to be published in the coming months, will provide more detail on this.

Schemes must demonstrate that individuals are fit and proper, that adequate systems and processes are in place to run the scheme, that the scheme funder is appropriate, and that the mastertrust is financially sustainable.

Duncan Buchanan, a partner in the London pension team at law firm Hogan Lovells, said: “I think all of it is going to be difficult for a majority of mastertrusts.”

The regulator is aware of 81 schemes in the sector, according to its latest figures; Buchanan said it would be “much happier if it were about five or six”.

Nest not making any promises

A lot of orderly consolidation is already underway, albeit largely behind closed doors. The People’s Pension absorbed Your Workplace Pension in April, and Pensions Expert revealed Salvus’ acquisition of Complete in the same month.

But Buchanan agreed that some schemes set up by speculative investors are unlikely to have enough assets to meet the continuity requirements, and indeed will have owners who are unwilling to delve into their own pockets to solve problems.

“I doubt that they’ll be doing anything and spending any of their money,” he said, adding that Nest, the mastertrust set up by government, “would be the obvious place to put the stranded mastertrusts”.

Nest has now had restriction on bulk transfers in lifted, but has stressed that it is under no legal obligation to accept transfers and must take decisions with the interests of its current members in mind.

Neville Howe, Nest’s general counsel and corporate secretary said:“Any decision to look after existing savings will be made on a case-by-case basis and we encourage any scheme that is looking to exit the market and to involve Nest in their plans to contact us at an early stage.”