Clarification of our expectations
As you’ll know, one of the most important elements of a master trust continuing to meet authorisation criteria is having enough money set aside to cover the cost of a triggering event.
We are aware that this is a complex issue and we’d like to clarify our expectations in this area because some schemes are currently relying too heavily on future income to offset these costs.
We are not prescriptive about the assets that must be held to meet these costs, but it’s better for schemes to have a known reserve to meet their duties following a triggering event, rather than being dependent on an uncertain future flow of money.
Legal test
Section 8 of the Pension Schemes Act 2017 sets out the legal test we will apply in respect of financial sustainability, and on which we will base our decision on whether a scheme should be and/or remain authorised.
In our master trust code of practice we state that an offset against future income should not usually represent a significant proportion of the reserves held by the scheme. We will consider each scheme on its own individual circumstances, but we believe an offset above 20% of financial reserves is likely to be significant for the majority of schemes.
If schemes intend to propose an offset, they should be prepared to fully explain the proposed level and how it meets the requirement in section 8.
What you should do now
Ultimately, we need to be continually satisfied that schemes will be able to immediately and reliably access sufficient funds so they can carry out their duties following a triggering event. If we’re not satisfied on this point, we may not be satisfied that a scheme should be and/or remain authorised.