The success of auto-enrolment, which various Government and Opposition Members have already discussed, means that more people are saving into a private pension, and as I have explained, many of those are saving into master trust pension schemes. Master trust schemes are regulated by the Pensions Regulator and occupational pensions legislation. However, as I explained, that legislation was developed mainly with single employer pension schemes in mind. Master trust schemes have different structures and dynamics, so the Bill introduces a new authorisation regime for them. The market has grown very quickly, and we now have to respond to ensure that that part of the pension market develops in the right way.
The authorisation regime has been designed to address the specific risks that arise in master trust structures. The criteria for becoming authorised were developed in discussion with the industry, and the risks that they address include the kinds of risks that the FCA regulation addresses with regard to group personal pension schemes, which I mentioned before. At the moment, master trusts are outwith that kind of regulation, but master trust schemes have some similarities with those schemes.
The requirement to become authorised creates a barrier to entry to the master trust market, so rather than us waiting for things to go wrong, the interests of scheme members will be protected in a proactive manner, because new master trust schemes will be prohibited from taking on members until they have satisfied the regulator that they meet essential quality standards. Existing schemes will have to become authorised to continue operating in the market. New schemes will have to be newly authorised.
Introducing a requirement for authorisation is a proportionate response to the rapid development of master trusts, given the types of risks inherent in the structure of the schemes. Clause 3 prohibits a person—a “person” being an entity—from operating a master trust scheme, unless that scheme is authorised by the regulator, and so is the core and foundation of the whole authorisation regime.
The clause also sets out the consequences of breaking the prohibition. It is important that those consequences are clear and firm. If the regulator becomes aware that a scheme is operating without authorisation, clause 3 requires it to issue a notice to the trustees of that scheme, explaining that the scheme is not authorised. Such a notification—I am sure we will discuss the effects of this later—is a triggering event that requires the scheme’s trustees to transfer the scheme’s members out and wind up the scheme. The risk of being shut down by the regulator is a strong deterrent that will ensure that the authorisation regime is taken seriously. The clause also gives the regulator the power to issue a civil penalty if the prohibition has been broken. This will act as an additional deterrent to anyone who may seek to operate a master trust scheme without authorisation.
Finally, the clause defines the term “operates” for the purpose of this part of the Bill. A person operates a master trust scheme if that person accepts money from members or employers in relation to the scheme, or enters into an agreement with an employer that relates to the provision of pension savings for employees or other workers. The scheme is quite technical, but it is necessary because so much flows from it.