Better workplace pensions: further measures for savers


Introduction

On 27 March 2014, the DWP issued a command paper (the “Paper”) proposing a range of measures aimed at improving the quality of workplace DC pension schemes.  The measures are driven by the large numbers of members now joining auto-enrolment schemes and follow the Government’s consultations onminimum quality standards and pension charges (see our Alert for details) and the OFT market report.

In this Alert:


Key points

The changes will come into force in two stages, April 2015 and April 2016, with potential for further changes in 2017.  They cover:

  • Governance – minimum requirements will apply from April 2015 for all DC workplace pension schemes:
    • Occupational pension scheme trustees will need to provide an independently audited statement that they have met the new governance standards.
    • Contract-based schemes will need to establish Independent Governance Committees (IGCs) to perform a similar role to trustees, to improve accountability and assess value for money.  They will also have an obligation to report on how they have met the new governance standards.
  • Charges – from April 2015 there will be a charge cap on default funds of 0.75% and a ban on commission/consultancy charges in DC schemes which can be used for auto-enrolment (“AE”) (known as “qualifying schemes”).  From April 2016, all active member discount (AMD) structures and member borne commission payments will be banned in qualifying schemes.
  • Transparency – from April 2015 there will be mandatory disclosure of costs and charges in a standard format and a duty on trustees and IGCs to consider and report on these.

Background

The main driver behind these proposals is AE.  The Government recognises that it is vital to ensure people are saving into high quality, value for money schemes and that all individuals can have confidence in their private pension saving.  Similarly, for the planned system of automatic transfers (see our Alert for details) to be successful, it is essential that individuals will be moved from one good quality scheme to another.


Minimum quality standards

The Government proposes the following standards for all DC workplace pension schemes:

  • All schemes must be governed by a body with a duty to act in members’ interests (trustee(s) for trust-based schemes and IGCs for contract-based schemes).
  • The governing body must be able to freely exercise its duty to act in members’ interests and must be able to explain how any conflicts of interest are handled.
  • The majority of individuals, including the chair, of the governing body must be independent of the pension provider and, to address potential conflicts of interest, the boards of master trusts will face extra requirements to demonstrate their independence.
  • The governing body must consider the design and net performance of default investment strategies; standards of administration; charges borne by scheme members; and costs incurred through investment of pension assets.
  • The governing body must have, or have access to, all of the resources, knowledge and competencies necessary to properly run the scheme.
  • The chair of the governing body must produce an annual report explaining how the scheme has performed against the quality requirements.

Implementation of the new standards will impact on how many trust and contract-based schemes are governed from April 2015.

The Paper suggests that some of the detail, particularly around administration, may be set out in guidance, for example, by extending TPR’s Code of Practice on DC schemes and also the new master trust assurance framework which is due to be published in summer 2014 (see our Alert for details).

The FCA will be responsible for formulating the detail around requirements for contract-based schemes, although proposed terms of reference for IGCs are already included in the Paper.  The new requirements will include a duty upon IGCs to act in the interests of members and to report on how they take into account member input, in accordance with the OFT report.


Charges and transparency

The Government’s proposals are intended to ensure that:

  • the charges borne by members in default arrangements are fair, and
  • there is full transparency of all costs and charges.

New disclosure requirements will require:

  • Providers of workplace DC schemes to disclose full information on all charges and costs in a standardised and comparable format to trustees and IGCs.
  • Providers and trustees to provide information, in a standardised comparable format, about charges and costs to employers before the employer selects a scheme and then annually.
  • Providers and trustees to provide information about charges to new and prospective scheme members, and headline charges and costs annually, in their annual benefit statement.
  • The Secretary of State and the FCA to legislate/make rules to require the publication of information about transaction costs and administration charges.

This transparency is designed to enable employers and trustees of workplace pension schemes to understand and compare the charges being paid and assess schemes’ relative value for money.


Proposed timetable

Date
Measure

15 May 2014

Closing date for consultation on quality standards

Summer 2014

FCA to consult on rules for IGCs

Autumn 2014

Regulations to be published on quality and charges

April 2015

New governance standards for all DC workplace schemes to be introduced

 

New FCA rules on IGCs to be introduced

 

New requirement for trustees and IGCs to report on costs and charges

 

“Guidance guarantee” to be introduced as per George Osborne’s Budget announcement that all members of DC schemes will be offered free, impartial, face-to-face advice on how to get the most from their retirement choices

 

Default fund charge cap of 0.75% of funds under management for all AE schemes

 

Ban on consultancy charges extended to all “qualifying schemes”

April 2016

AMD structures and member borne commission payments banned in qualifying schemes

2017

Government to consider whether to change the composition of and/or lower the default fund charge cap

 


Action points

Trustees and employers can make progress towards the proposed requirements on governance and charges by assessing their scheme’s compliance with TPR’s DC Code of Practice and related guidance, as well as by analysing their current costs and charges.  For assistance, please speak to your usual Sackers’ contact.