The Pensions Authority recently published its response to an earlier 2018 consultation paper on Defined Contribution (DC) Master Trusts after receiving submissions from a number of different stakeholders.
It appears from the response that Master Trusts will be carefully regulated in Ireland, which might decrease their attractiveness from the perspective of employers, providers and members.
The Pension Authority’s recent paper refines and alters some of the proposed obligations for Master Trusts. We highlight some of the more important issues from this paper.
The Pensions Authority has decided to retain the requirement that the trustee of a Master Trust be structured as a designated activity company (DAC).
There must be a minimum of two directors of the trustee DAC. One of these must be independent as must the chair. An independent chair satisfies the independent director requirement.
The independent requirement is satisfied if the person has “no interest in the assets of the scheme other than as a trustee and is not connected or associated with the shareholder of the trustee company”.
Directors of the trustee DAC must have “appropriate” qualifications and expertise.
The sole function of the trustee DAC is carrying on the business of being a trustee for “one and only one” named master trust.
Conflicts of Interest
The Authority has moved away from an overly restrictive regime on conflicts of interest and will only require that the Master Trust must not contain a provision that binds the scheme to a particular service provider.
Communication is Key
The Pensions Authority will require that all Master Trusts have a written policy for engagement with employers and members. Points to note concerning this policy include:
It must set out in detail the format and frequency of engagement with members and employers.
There is no longer a specific requirement to hold a meeting with members, it appears that this will be optional.
There must be documented evidence of the implementation of the policy.
More specific guidance has been provided on the continuity plan that must be put in place by the Master Trust. Of particular note are the requirements that:
The continuity plan must contain projections of income and expenditure to be categorised as “best, unfavourable and favourable”.
The continuity plan must be viable under all scenarios, not just a reasonable prospect of viability as previously suggested.
The Pensions Authority has indicated that they will, over time, analyse the projected outcomes in the continuity plan against achieved outcomes.
The trustees must also be able to display an understanding of the continuity plan, which must be submitted to the Pensions Authority, and reviewed annually.
More detail has been provided on the capitalisation requirements for DC Master Trusts.
Master Trusts have to demonstrate that they have sufficient capital to cover running costs and the cost of winding up the scheme without affecting member funds.
The minimum total reserve for running costs to be held has been set at €100,000 regardless of membership numbers, with €70 to be held per member for winding up costs.
The trustee must ensure on an ongoing basis that they are compliant with the capital requirement and report back to the Pensions Authority if they are no longer compliant.
An annual report must be made to the Pensions Authority on the capitalisation position.
The risk assessment for Master Trusts must be prepared every three years and include risks specific to the running of a potentially large multi-employer scheme.
This risk assessment must be reviewed by the trustees annually to ensure it’s still valid. Three issues which must be explicitly considered within the Own Risk Assessment of a Master Trust are:
As Master Trusts are multi-employer, the administration is more complicated by virtue of the need to collect contributions and data from multiple sources.
Master Trusts are in effect third party financial institutions which may be run for profit or have close connections with for profit entities. This may create conflicts of interest that do not arise with single employer schemes.
Employers are much less involved in Master Trusts than they would be in single employer schemes. This removes both a level of informal oversight of the scheme and an important channel of communication between members and trustees.
The Pensions Authority will require that trustees have a written policy which sets out:
How charges are transparently disclosed, with the Authority having to be satisfied that the charges are reasonably understandable.
Increases in charges will only be made giving six months’ notice.
Members can transfer assets in and out without charge.
It is important that trustees are aware of the rate at which new members join the scheme to ensure there is capacity to facilitate their membership.
Trustees must consent to the enrolment of new members. The Authority will not require the individual approval of each member, an agreed strategy in general terms will suffice.
Trustees must have consented to the general marketing approach of the scheme to ensure that marketing is not misleading or inadvertently creates potential obligations for trustees that can’t be met.
The Pensions Authority requires / believes that the master trust must have an appropriate wind-up procedure in place.
The requirements listed are that:
Trustees must have written procedures they will implement in a wind-up
Procedures must ensure that benefits are transferred to other pension arrangements efficiently, in a timely manner and without cost to members.
Trustees must ensure that these procedures are kept up to date.
Reporting to the Authority
The Pensions Authority will consider Master Trusts to be in the highest risk category for supervision, with specific reporting requirements in place.
On the occurrence of any of the following events, trustees must notify the Authority and provide further information:
A breach of capital requirements, or
A decision to wind-up the master trust, or
A change of control of the trustee company.
Master Trusts appear to be here to stay, with these provisions intended to be incorporated into codes of practice in the near future. The intention is for Master Trusts to achieve the same popularity in Ireland as in the UK, where growth has been considerable in the past 10 years.
Areas such as the capitalisation requirements may remain a cause for concern, and it remains to be seen whether the revised regulations put suppliers off launching their own Master Trust products.
For expert advice on the development of Master Trusts in Ireland and their potential for your organisation, please contact a member of our Pensions team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.