Many businesses have used mastertrusts to fulfil their automatic enrolment duties. There will shortly be some changes to both the automatic enrolment regime and also the mastertrust regime. What are these changes and what effect will they have?


The Pensions Regulator has said that, from February 2018, every employer will have pension duties and must enrol all qualifying staff into a pension scheme. It has also said that mastertrusts are one of the most effective ways for members to save into a secure and well-run scheme. There will shortly be some changes to the automatic enrolment regime, and the Regulator will soon have power to supervise mastertrusts so that, in future, they will have to be authorised.

Automatic Enrolment

The Regulator’s publication ‘Automatic Enrolment: commentary and analysis,’ explains that automatic enrolment commenced in October 2012. Businesses must enrol eligible job holders into a qualifying pension scheme and make contributions to it. This presently applies to workers who are aged at least 22, but under State pension age, usually working in the UK, and earning more than £10,000 per year, unless they are already a member of a pension scheme which meets certain criteria.

A worker who is automatically enrolled into a pension scheme may opt out of it within one month. Minimum contributions are being phased in. The initial rates were a minimum of 2% of qualifying earnings overall (with at least 1% from the business). In April 2018 that will increase to a minimum of 5% overall (with a minimum of 2% from the business). And, from 6 April 2019, it will increase to a minimum of 8% overall (with a minimum of 3% from the business). There is more information about these increases in the Regulator’s publications.

Every 3 years, staff who were automatically enrolled, but opted out of (or ceased active membership of) a pension scheme, more than 12 months before a business’s re-enrolment date, must be automatically re-enrolled into the scheme. As before, they may opt out.

The Regulator’s online tools include an automatic enrolment Duties Checker.

…mastertrusts are one of the most effective ways for members to save into a secure and well-run scheme.

What is a mastertrust?

A mastertrust is a form of multi-employer occupational pension scheme, which businesses can use for their staff, instead of setting up their own scheme.

The DWP has said that mastertrusts can offer good value for members and employers, and that they offer a number of advantages, such as scale, good governance and value. The Pensions Regulator believes that authorised mastertrusts will be the lynchpin in the development of a sustainable and safe occupational-defined contribution pension schemes market.

Many businesses have used mastertrusts to fulfil their automatic enrolment duties.

The concerns about mastertrusts

The concern is that savings could be at risk from those mastertrusts which do not meet minimum governance standards. So, the Pension Schemes Act 2017 will require mastertrusts to meet higher operating criteria: they will have to be authorised by the Pensions Regulator before they can operate.

The Regulator will also have power to intervene where schemes are at risk of failing. The Regulator says that the new measures will provide consumers and employers with confidence, and that those mastertrusts which do achieve authorisation will be suitable for any business which wishes to use them for its staff.

There are many mastertrusts operating in the UK pensions market, and these new, higher, standards are expected to result in some consolidation. The Regulator has welcomed the continued reduction in numbers of defined contribution pension schemes. It has been concerned about a tail of substandard schemes, and has been encouraging trustees who cannot, or will not, achieve the standards which it expects, to consider consolidation.

What new criteria will mastertrusts have to satisfy, and by when?

There will be 5 key criteria:

+ Persons involved in the scheme must be fit and proper

+ The scheme must be financially sustainable

+ The scheme funder must meet certain requirements, aimed at providing assurance about their financial situation (by presenting a business strategy and fully audited accounts)

+ Systems and processes requirements, relating to the governance and administration of the mastertrust, must be sufficient

+ The scheme must have an adequate continuity strategy.

The new mastertrust regulations are expected to come into effect in October 2018, and mastertrusts will have to be authorised by the Pensions Regulator by then if they wish to continue to operate. Otherwise, they may need to be wound up.

Mastertrusts will also have to continue to satisfy the authorisation criteria on an ongoing basis, including being able to show that member funds would be protected if a scheme had to be wound up.

The Regulator has said that it will assist those mastertrusts which do not apply for authorisation, or which fail to meet the required standards, to leave the market, with a view to minimising the impact on savers.

What effect will the new criteria have on the mastertrust market?

As well as the new criteria, there will be compliance costs. Because of this, there is expected to be some consolidation of mastertrusts. Some of the smaller mastertrusts, which have fewer funds under management, and for whom the regulatory costs may be too high, may decide to exit the market.

There will be a one-off authorisation fee, which is yet to be finalised. It is suggested that new trusts can expect to pay ‘no more than £24,000,’ and existing trusts ‘no more than £67,000.’

The DWP anticipates that 28 schemes will take the decision to wind up before the new regulations take effect, and it estimates that it could cost individual mastertrusts between £89,000 and £196,000 to exit the market.

In addition, schemes, or funders which stand behind the schemes, will need to pay the winding-up costs, so as not to pass these on to their members.

Mastertrusts and The Pension Schemes Act 2017

Many more people are saving into defined contribution pension schemes. Mastertrusts account for a major proportion of the increase, and now account for 10 million defined contribution savers.

The Regulator has welcomed its new powers to authorise and supervise mastertrusts. The number of mastertrust providers has grown over recent years as more staff are put into pension schemes, so their savings need to be secure.

Regulations under the Pension Schemes Act 2017 are being developed, and the Regulator says that they will give it the power to ensure that mastertrusts are being run by fit and proper individuals, and that they are financially stable and secure.

What will this mean for businesses?

Most businesses have used mastertrusts to fulfil their automatic enrolment duties, and the DWP has said that mastertrusts can offer good value for both members and employers.

There are estimated to be around 87 mastertrusts currently operating, and the DWP anticipates that 28 of those will decide to wind-up before the new regulations take effect, expected to be in October 2018.

The Cheviot Pension is one of the mastertrusts which is currently used by employers to fulfil their automatic enrolment duties. Cheviot has been operating since 1930, and it will be applying to the Regulator for authorisation to continue operating under the new regime.

Businesses may wish to contact the mastertrust with which they currently deal, to find out what its future plans are in relation to the new regime, and how far those plans have progressed.

They may also wish to check that their systems are equipped to deal with the increases in the minimum automatic enrolment contribution rates which will come into effect in April 2018 and April 2019.

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