Getting ready for master trust authorisation:  Code of Practice 15

The Code of Practice 15 (CoP 15) laid before Parliament in July 2018 makes clearer the updated requirements for master trust authorisation 1 October 2018 to 31 March 2019. These combined with the Pensions Regulator (TPR) August responses from the June Readiness Review can give the insight needed to pinpoint what may be missing from a master trust (MT) application.

The 5 key authorisation criteria remain: a. Fit and proper, b. Systems and processes, c. Continuity strategy, d. Scheme funder, e. Financial sustainability

Here is a summary of key evidence required incorporating the updates:

a. Fit and proper (pp 11-21)

A declaration and criminal conviction certificate will be required for each individual subject to the assessment (person establishing the trust, trustee, scheme funder, scheme strategist, persons who can appoint or remove trustees, persons able to vary the terms of the trust). Trustees and strategists may need evidence of competence, including statement of development, evidence of qualifications or learning programmes and other relevant professional experience.

A person’s conduct over the five-year period before the authorisation application in relation to, a role held relevant to the assessed role will be assessed (#95 p20).

There is no longer a need for trustees to demonstrate a minimum of 10 years’ experience, with more focus on what is appropriate for the individual master trust.

It is important that trustee boards demonstrate the right blend of skills and experience needed for their scheme and their assessment of it.

b. Systems and processes (pp22-34)

A considerable amount of evidence is required to demonstrate a scheme has effective systems and processes for running and governing the scheme and its operations, from its third parties. This includes the evidence given to an external assessor where external assessments are referenced in the scheme submission to TPR.

A TPR systems and processes guide is to come to give further clarity of the specific areas where TPR believe independent external assessment frameworks and accreditations may support a scheme submission (#106 p23).

The ‘not more than 6 months’ requirement for date of evidence from date of submission for authorisation has been replaced as a ‘TPR preference’ and acceptance that evidence over 6 months old can be submitted on grounds of practicality and provided trustees have satisfied themselves that no changes in the systems and processes from the date of this older evidence.

Extracts of evidence are less favoured than a larger document with the relevant piece of evidence identified and referenced.

Key paragraphs are #103-105 (p23): The application should provide details of the assessment that the trustees have undertaken to demonstrate that the master trust meets the systems and processes requirements. This could be demonstrated through independent checks on the master trust, internal audits and scheme documentation, particularly in respect of the functionality and maintenance of IT systems. Our expectation is that, if the trustees do not have the internal expertise to assess the master trust systems and processes, then they will need to include evidence in the authorisation application that the master trust has had an external, independent external assessment, particularly in respect of the functionality and maintenance of IT systems.’

TPR will want to see more description of scope, methodology and supporting evidence for external assessments. For example, a statement of which control objectives have been assessed, whether there was a site visit and the range of evidence assessed.

Reliance on a third-party administrator is only acceptable to TPR where trustees demonstrate they have full accountability and assured themselves of how requirements are met even though the activity itself is delegated, the accountability cannot be delegated (#102 p23).

TPR understand that there may be practical difficulties where an AAF report may have been undertaken by a third-party administrator (TPA). Trustees still need to be able to provide evidence that a process or IT system feature is working and being monitored to check it is continuing to work overtime. This will require trustees giving details of the recent reviews and any action taken.

The problem of a TPA AAF 01/06 assurance report having its master trusts out of scope still remain as there is no immediate link to the external service auditor’s clean opinion and re-assurance that the control procedure is working effectively.

 c. Continuity strategy (pp35-46)

Evidence required is the written continuity strategy with approval by each scheme funder, scheme strategist and scheme trustee.

Every level of the administration charge must be included as part of the continuity strategy as a single document or provided as a standalone document in an electronic format that is Excel compatible with clear data labels.

The continuity strategy can be included as part of the master trust’s business plan if it is clearly identifiable as a distinct part of the business plan.

TPR have made it clear in the updated Code for it to be a high-level and wide-ranging document, setting out the principles and framework for identifying the main actions, decisions and those required to deal with the triggering event and protect members.

The strategy should retain enough flexibility to allow the trustees to tailor their approach in response to a specific triggering event that may occur. It should also set out sufficient detail to enable the calculation of the costs identified for the Costs, assets and liquidity plan (CALP) (#136 p38).

Clearer information is given in the code of what is required to be in the continuity strategy relating to triggering events (#138-149 pp39-40). Terms such as ‘third party charge’, ‘discounted levels’, ‘charge structure’ and ‘bespoke pricing model’ (p36) are defined and explained.

d. Scheme funder (pp47-51)

Evidence required are scheme funder accounts and other financial information (described in #185 p49) to demonstrate their ability to meet certain costs of the master trust. Additional financial and other information will be required for scheme funders who wish to carry on other activities not directly related to the master trust. Explanations are required if some of the financial information is missing (#187 p49).

Exemptions require evidence of details of the financial support the scheme funder provides to the master trust, such as legally binding agreements, cash held in a bank account, or escrow, with suitable controls over its use (#182 p48).

Exemptions are still needed where a scheme funder carries out business not directly related to the master trust. Where a scheme funder only carries out activities in relation to the master trust, but is part of a wider group, TPR will consider the financial strength of the group as a whole and the relationship of the scheme funder with the wider group and look for clear and credible evidence of its ability to support the master trust (#183 p48).

If a scheme funder is unable to provide audited accounts at the time that it becomes the funder of a master trust, either before or after authorisation; the scheme funder must set aside assets to the value of at least 50% of the sum required by the master trust’s financial sustainability modelling, or the whole value of the financial reserves identified in the costs, assets and liquidity plan (CALP) if this is less. The amount set aside will have to be held in a separate trustee deposit account with a deposit taker. The sum must be deposited within three months of the scheme funder taking on their role and held in the trustee deposit account, unless required for a triggering event, until such a point as   the scheme funder can provide audited accounts (#200-201 p51).

e. Financial sustainability (pp52-74)

The evidence required is the CALP: the part of the business plan which summarises the costs of running and the financial resources available to the master trust; and ‘any other evidence necessary to demonstrate a scheme’s financial resources’.

This is expanded in #209-210 p54 as:  the business plan, the master trust’s accounts, the scheme funder’s accounts, the statement of investment principles, the most recent chair’s statement. And in addition to this potentially:

  1. the master trust’s CALP, where this does not form part of the documents listed above,
  2. where the scheme funder is an insurer or bank, evidence of any reserves held for supporting the activities of the master trust,
  3. any documentary proof of support being offered by the scheme funder or funders,
  4. details of any joint bank account or escrow held by or on behalf of the trustees and scheme funder,
  5. for earmarked schemes, the latest accounts of the insurance company holding the ear-marked insurance policies or annuity contracts, and any group of which it is part of, where these are not already provided,
  6. relevant extracts of the master trust’s trust deed and rules, which govern expenses and winding up arrangements,
  7. details of service contracts and insurance policies held by the trustees,
  8. any other documents that the scheme can demonstrate to be relevant.

The CALP is extensively described in #248-287 pp62-71. The Scheme funder should consider run on costs for two years after the triggering event, although TPR will consider costings of less than two years if there are specific circumstances (#256 p63).  The schemes will need to provide an estimated monthly income profile for the scheme after a triggering event (#268 p66).

For most MT assets and revenue held the TPR applies ‘haircuts’ (the discount to the current value of an asset that is applied for the purpose of calculating the value of assets to be held in the CALP). The haircuts table (p69-70) sets out clearly how a range of assets should apply a % discounts over four scenarios to cover 1) normal running costs, and costs of a triggering event over 2) Within a month, 3) Between 2-12 months, and 4) more than 12 months. Mixed benefit schemes will need to take legal advice as to how unallocated assets could be used.

In the CoP15 consultation response TPR has doubled the current minimum to be held by schemes using the basic method (#224 p57)  to £150,000 for master trusts with less than 2,000 members (p15 Consultation response).

The business plan (pp75-85)

Evidence required for the business plan must not be more than six months old and should be detailed to demonstrate careful consideration of the legislative requirements and code.

Information on milestones and measurement are given in #344-6 and target market including Automatic Enrolment (AE) purposes. Significant failure points for their master trust with tolerance levels and trigger-points for notifying TPR of any changes that the strategist considers to be prudent are required (#352-3 p84).

TPR expect there are sufficient processes to identify, and appropriately address significant events, within a master trusts systems and processes (#354 p84). This ties in with the legal requirements under the Pension Schemes Act 2017 s16 to report to TPR of a significant event as soon as reasonably practicable. TPR give an explanation of what a significant event may be in #373-380 pp87-88. These include a change to the statement of investment principles.

As a minimum TPR expect the tolerance levels and trigger-points to include changes to current or planned: a) membership numbers, b) classes and proportions of scheme assets, c) future income from participating employers, and d) changes to support available from scheme funders.

The business plan has to have objective assets such as assets under management or number of members for the master trust (#309 p76) usually set by the scheme strategist.

There must be consistency between forecasts in the business plan and the capacity within systems and processes. The business plan must cover a period of between three and five years. Wherever the business plan includes estimates, it must include a statement of the assumptions used in reaching those estimates, the basis on which these assumptions have been made, the factors that may cause these estimates to vary, and by how much.

Consolidation of other master trusts and pension schemes should be clearly identified, the costs of these acquisitions and the potential funding sources to finance such expansion. Estimates of future growth of membership, contributions, income and costs should be prudent, with considered

consequences of failing to meet certain targets or assumptions used in its modelling.  The parameters for all assumptions should be clearly set out so TPR are able to consider how reasonable they are. Consideration should also be given to the consequences of exceeding forecast growth.

Information is needed on scheme funders. A scheme funder may have a single shareholder or be reliant on a particular individual or major shareholder. TPR normally consider a scheme funder to be reliant on any person who exercises or controls, on their own or together with any person with whom they are acting in concert, 33% or more of the votes able to be cast on all or substantially all matters at general meetings of the company, or who owns 33% or more of the share capital of the company. In these situations, TPR expects the business plan to include details of the succession planning and any key person provisions covering the event that the shareholder or single individual ceases to act as, or be connected to, the scheme funder (#337-338 p81).

Information is needed on the scheme strategist. The business plan must give a declaration as to the experience, knowledge, professional qualifications and competence of the scheme strategist, including plans to improve competence. It should also describe the experience and competence of others involved in running and controlling the scheme. In the majority of cases, these individuals will be the trustee, any other strategist and scheme funder.

TPR can receive a revised business plan though any delays may affect the regulator’s view as to whether the scheme meets authorisation criteria. If a scheme has experienced a triggering event and TPR has approved an implementation strategy in relation to the scheme, TPR may waive the requirement for a revised business plan to be submitted to allow efforts to be focused on implementation of a relevant continuity option.

If you require any assistance please contact Andrew Riley Director of Assurance on 020 7112 8300 alternatively you can email Follow the link for Authorisation and supervision of master trusts – Code of Practice No 15.