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IORP II – Roadmap to Master Trust for Defined Contribution Schemes?

As highlighted in our client briefing note last week, the final form of the Pensions Authority’s Code of Practice for trustees of occupational pension schemes and trust RACs includes a new chapter addressing some key areas relating to the governance of defined contribution Master Trusts.

The new chapter draws on the Pensions Authority’s response to the consultation on Master Trusts published in 2019 and its 2020 Engagement Programme Findings on Master Trusts.

Master Trusts are currently attracting considerable interest from employers and pension scheme trustees, and it’s easy to see why. A Master Trust, such as LifeSight Ireland, is a completely outsourced defined contribution pension scheme solution, that retains the core benefits of trust-based pension provision but with an inbuilt governance regime. For many employers, it is likely to be the most efficient and cost-effective route to meeting all of the new compliance and regulatory obligations.

A correctly structured Master Trust will cover all of the new requirements of IORP II and the Authority’s Code of Practice, including the risk management and internal audit key function holder appointments. While achieving compliance is certainly possible under an ‘own trust’ arrangement, the additional governance requirements will result in potentially much higher running costs for employers that continue to operate an own trust plan. Of course, cost is not the only determining factor, and it remains important that employers and trustees choose the best solution for their particular pension arrangement.

What’s in the new chapter?

For the trustees and founders of Master Trusts, the Code of Practice provides clarity in terms of what will be expected of them under the new regulatory regime.

For employers, it provides a useful set of searching questions to ask when considering a move to Master Trust.

The key points are:

  • There must be a corporate trustee which is established as a designated activity company (DAC), with the sole purpose of governing one specific Master Trust. The DAC must have at least two directors of whom one must be independent, as defined in the Code, and the Chair must be independent. Each director must satisfy either the qualification or experience requirements for trustees, subject to a minimum of one director having the qualification and another having the experience. This means that every director must have either a listed qualification or relevant experience.
  • Trustees must address and seek to manage conflicts of interest between the trust and its founder – for example:
    • Decisions in relation to the removal or appointment of service providers should be considered objectively and not influenced by the relationship between the Master Trust and its founder;
    • Where the trustees cannot resolve an issue without the consent of the founder, the trustees must raise the matter with the founder and report to the Authority if they remain unhappy with the outcome.
  • Master Trusts must be able to demonstrate that they have sufficient capital to cover running costs, and potential winding up costs, without affecting members’ benefits. There are particular measures covered by the Code, which include an obligation to self-report should the trust become non-compliant with the capitalisation requirements.
  • A business continuity plan must be put in place that includes projections of income and expenditure, to demonstrate the viability of the Master Trust to the Pensions Authority. These plans must be reviewed each year and must show projections on three bases: a best estimate, an unfavourable estimate and a favourable estimate. The details in the Code stop short of prescribing measures or assumptions to be used in preparing continuity plans.
  • Charges must be transparent and understandable to members. There must be written policies specifying (a) how charges will be disclosed to members, (b) that increases in charges will require six months’ notice to members, and (c) that transfers in or out will not incur a charge. Trustees must also maintain written winding up procedures, that ultimately aim to deliver timely and cost free transfers to other arrangements in the event a winding up occurs.
  • A Master Trust’s policy on engagement will need to cover communications with employers as well as members.
  • Trustees must ensure they are satisfied that marketing is not misleading and does not create obligations which they cannot deliver. Trustee consent will be required on the general marketing approach and the materials used, even if they do not have responsibility for the overall marketing approach.
  • Finally, there is a requirement to notify the Authority in the event that there is a breach of the capital requirements, a decision to wind up or a change in control of the trustee company.

The Pensions Authority is due to publish further information for the public and employers about Master Trusts during the week commencing 13 December. This should provide additional employer-specific guidance around the minimum standards to expect from a Master Trust provider.

Shane Murphy FSAI
Director, Retirement
Direct  + 353 (0) 1 614 6831