Better workplace pensions – response to consultation
On 4 February 2015, the government published the response to its October 2014 Command Paper regarding governance and charges in occupational pension schemes providing DC benefits (see our earlier Alert). The final regulations were laid before Parliament on the same day.
In this Alert:
- Key points
- Minimum governance standards
- The chair’s annual statement
- Charge cap on default funds
- Regulatory approach
- Action points for trustees
- Subject to certain exceptions, the new minimum governance and charges requirements will apply to all DC occupational pension schemes and to the DC elements of non-DC schemes from 6 April 2015.
- To ensure a level playing field, the FCA has also published final rules requiring the providers of workplace personal pension schemes to set up and maintain independent governance committees (IGCs). We will be issuing an Alert on this shortly.
- From April 2016, member-borne adviser commissions and consultancy charges, as well as active member discounts, will be banned from schemes used to satisfy an employer’s AE duties (“qualifying schemes”).
- Now that final details of the new requirements are known, trustees and providers should take steps to ensure their schemes will comply (see “Action points for trustees” below).
Subject to limited exceptions, the government has confirmed that new minimum governance standards will apply to all DC workplace pension schemes and to the DC elements of non-DC schemes from 6 April 2015. In particular, trustees will be required to:
- design default arrangements in members’ interests and keep them under regular review
- ensure that core financial transactions are processed promptly and accurately
- assess the value of costs and charges borne by scheme members
- have a chair of trustees.
In addition, to ensure that trustees have freedom to switch provider where it is in members’ interests, an overriding provision will prevent the governing documentation of occupational schemes from requiring trustees to use particular service providers.
Some schemes will be exempt from the new governance requirements, including:
- schemes whose only DC benefits are AVCs
- executive pension schemes
- small self-administered schemes.
The chair of trustees will be responsible for signing off an annual statement, which will form part of the scheme’s annual report, on how the governance standards have been met. In brief, the statement will have to:
- report the level (or range) of charges and transaction costs in the default arrangement(s) and the range of costs and charges in other funds and their assessment of the extent to which the charges represent good value
- describe how the TKU requirements have been met throughout the year and give an explanation as to how the trustees have, or have access to, all the competencies necessary to run the scheme properly.
The chair’s statement will need to be produced on an annual basis and included in the scheme’s annual report (which is due within 7 months of the end of the scheme year).
The original regulations provided that, where the first scheme year ending after 6 April 2015 is sooner than 5 April 2016, the statement should relate to the period from 6 April 2015 to the end of the first scheme year. Recognising that this could result in a statement relating to a very short period of time (for example, where a scheme year ends on 30 April), as a one-off concession, the final regulations make clear that schemes will not have to produce a statement if the period covered is less than 3 months. Schemes in this position should simply roll that statement up into next year’s. For example, where the scheme year ends on 30 April, the first chair’s statement would be due within 7 months of the scheme year ending 30 April 2016, covering the period 6 April 2015 to 30 April 2016.
What is the cap and who is affected?
The aim of the 0.75% charge cap on default funds (the Cap) is to protect members who have not made an active choice about their pension investments.
The Cap will apply to all members of an employer’s scheme who actively contribute to the default arrangement at any point on or after the later of 6 April 2015 and the date on which the scheme is first used as a qualifying scheme for AE purposes. The Cap will continue to apply to these members for so long as they have funds invested.
However, the Cap will not apply to members who have already ceased contributing when it first applies, unless they make at least one contribution after that date. Also, the Cap will not apply to schemes where the only DC benefits are AVCs which are not being used by the employer to fulfil its AE duties.
What is the default arrangement?
The “default arrangement” is defined as follows:
- any arrangement into which workers’ contributions are directed without them having made an active choice
- an arrangement into which 80% of the employer’s workers are actively contributing on the later of, the date the Cap comes into force and the employer’s staging date (the one-off 80% test)
- an arrangement into which 80% of the employer’s workers who first contributed after the Cap came into force / the employer’s staging date are contributing (the ongoing 80% test).
The above means that a scheme may have more than one default fund.
As they are more likely to have made an active and informed choice, members whose only DC contributions are AVCs are now excluded from the definition of “contributing member” for the purposes of the 80% test. The regulations also now make clear that the ongoing 80% test will only apply to arrangements which first receive contributions from workers after 5 April 2015 or, if later, the employer’s AE staging date.
Information on compliance will be gathered via the scheme return. Trustees will have to:
- identify the chair of trustees
- confirm whether or not they have produced the chair’s statement on the governance standards
- confirm whether their scheme complies with the default fund charge cap.
With very little time allowed between the publication of the final regulations and implementation, trustees should be taking urgent action such as:
- identifying their default arrangements
- speaking to their investment consultants about how to assess their default arrangements so as to certify that they meet the Cap
- if the Cap is not met, take urgent steps to consider alternatives
- obtaining information on the range of costs and charges in their investment funds
- reviewing the scheme’s default strategy and assessing the performance of the default arrangement
- considering who should take on the role of trustee chair, if they have not already done so
- asking their administrators to confirm their procedures and timeframes for processing core financial transactions so that these can be reviewed
- reviewing and assessing their TKU arrangements
- checking whether there are any scheme provisions restricting the trustees’ choice of service provider.
If you wish to discuss any of these issues, please ask your usual Sackers’ contact.