The Department for Work and Pensions (DWP) has issued its response to consultation on minimum governance standards in DC workplace pension schemes, along with draft regulations on governance and charges in occupational pension schemes.
What schemes are affected by the changes?
From April 2015 new minimum governance standards will apply to the trustees of most occupational money purchase schemes. New charges measures are also being introduced from April 2015 and April 2016 for money purchase benefits within qualifying schemes used for workplace pension reform (automatic enrolment).
Some schemes are exempt from the new requirements, for example certain executive schemes and small self-administered schemes. Schemes where the only money purchase benefits provided are additional voluntary contributions (AVCs) are exempt from the governance requirements but subject to the charges measures (if within a scheme which is used as a qualifying scheme for workplace pension reform).
Trustees' annual statement
Trustees will be required to prepare an annual statement on how the governance requirements have been met. This statement must be available on request to members, prospective members and beneficiaries. All schemes will need to have a chair of trustees who signs the statement on behalf of the trustees.
Designing default arrangements
Trustees will be required to design default arrangements in members' interests and keep them under review. The trustees' annual statement must include:
- a description of the default arrangement(s)
- a clear statement of aims, objective and policies in relation to investments
- an explanation of how these are in the best interests of the scheme's membership.
The DWP expects trustees to take into account the level of costs and the risk profile that are appropriate for the scheme's membership in light of the overall objective of the default arrangement strategy.
The DWP says that its 2011 guidance on offering a default option will continue to be relevant to automatic enrolment schemes. It is considering whether any further guidance is needed to help trustees fulfil their new responsibilities.
Reviewing default arrangements
Trustees will be required to review:
- the default strategy to ascertain whether it remains suitable for the scheme's membership (changes in the pensions landscape should be considered, for example the recent Budget 2014 changes)
- the net performance of the investment funds underlying the default strategy, focusing on whether the returns have delivered the aims and objectives of the strategy
These reviews must take place at least every three years or without delay after any significant change in investment policy or membership demographics. The annual statement must include a report on any review undertaken and changes made.
Processing core scheme financial transactions
Core scheme financial transactions will need to be processed promptly and accurately. The annual statement will need to explain how trustees have assured themselves that this requirement has been met. The government does not intend to set out in legislation an exhaustive list of relevant transactions or specify how quickly each transaction should be executed.
Assessing charges and transaction costs
The government believes that knowing the charges that members pay and whether these represent value for money is central to trustees' ability to act in members' interests.
Trustees will therefore be required to calculate the charges and transaction costs borne by members and assess the extent to which they provide good value for members. The following must be reported in the annual statement:
- the charge levels and the trustees' assessment of the value delivered by these
- the levels of transaction costs (if trustees have been able to access this information) and their assessment of the value delivered by these
- details of any information about transaction costs that the trustees were unable to obtain and steps being taken to obtain that information
Choosing investments and providers
Schemes will not be allowed to restrict the choice of who provides administrative, fund management, advisory or other services to the scheme. Scheme rules containing such restrictions will be overridden by new regulations.
Trustee knowledge and understanding (TKU)
The DWP thinks it is essential for trustees to have the skills and experience to act in members' interests.
A new element of TKU is that the chair's statement must include an assessment of how the combined knowledge and understanding of the trustees, together with the advice which is available to them, enables them to properly exercise their functions as trustees.
Independence standards for master trusts
The government recognises that there is greater potential for conflicts of interest in master trusts. Master trusts will be required to have a minimum of three trustees, a majority of whom (including the chair) are independent of the providers used by the scheme.
The maximum term of any single appointment for an independent trustee will be five years and the process by which they are appointed must be open and transparent. Trustees of master trusts must encourage members to make their views known on matters relating to the scheme and the chair's statement must describe how this has been achieved.
Charges measures
New "charges measures" will apply to money purchase benefits within qualifying schemes used for workplace pension reform, subject to the exemptions mentioned earlier. The legal duty to comply with the charges measures will rest with trustees of occupational pension schemes and pension providers in workplace personal pension schemes.
The key changes are:
- a 0.75% charge cap on the default arrangement from the later of 6 April 2015 and the date on which the scheme begins to be used as a qualifying scheme (the "relevant date")
- active member discounts and member-borne consultancy charges and commission payments will be banned from 6 April 2016
The charge cap will cover all member-borne charges and deductions, excluding certain costs (transaction costs, the costs of pension sharing or complying with court orders, and winding up costs).
The charge cap is intended to protect those who have been defaulted into saving without making an active choice. It will apply to:
- members who actively contribute to the default arrangement after the relevant date and will continue to apply so long as those members have funds invested in the default arrangement
- all the member's funds in the default arrangement, irrespective of whether these contributions were made before or after the introduction of the cap to their scheme
Under the draft legislation a "default arrangement" is wider than a fund into which workers' contributions are directed without them having made an active choice. It includes a fund to which 80% or more of active members are contributing.
If, at any time in the three-month period ending with the date the charge cap applies to members of the scheme, a new charge compliant default is offered to all the members who are actively contributing to an arrangement, a worker can agree in writing to remain in that existing arrangement (and would not be subject to the cap).
In relation to active member discounts, the government has confirmed that the ban will not prevent employers paying, or subsidising, the member-borne deductions of active members, so long as the total charge level imposed is the same for contributing and non-contributing members.
Regulatory approach
The Regulator's annual scheme return notice will incorporate three additional questions which will be used to identify the chair of trustees, gather information on the completion of the chair's statement on governance standards and confirm compliance with the charges measures. In the case of non-compliance with the chair's statement requirement the Regulator can issue a fine against the board of trustees of between £500 and £2,000.
Implementation timetable
From April 2015
- new minimum defined contribution (DC) governance standards introduced (including requirement to assess and report on costs and charges)
- trustees must appoint a chair (subject to a three- month period of grace) who is responsible for signing off an annual statement on how the governance requirements have been met
- new independence requirements for master trusts
- duty on workplace personal pension providers to establish independent governance committees
- 0.75% charge cap on the default arrangement of a qualifying scheme
From April 2016
- Ban on member-borne adviser commission and consultancy charges in qualifying schemes;
- Ban on active member discounts (AMDs) in qualifying schemes
What actions do trustees need to take now?
If the scheme does not already have a chair of trustees, one needs to be appointed. There is a three-month period of grace from 6 April 2015 to appoint a chair.
Trustees will need to produce an annual statement (prepared within seven months of the end of the scheme year) on how the governance requirements have been met. This must be signed off by the chair. Although the annual statement itself will be prepared after the end of the scheme year, it must describe how the governance requirements have been met during the scheme year. It is therefore important for trustees to be aware of the new governance requirements and ensure they comply with them from 6 April 2015.
In relation to the new charges measures, trustees will need to consider the terms currently applying to their membership and whether any changes are needed. Trustees will need to assess and report on costs and charges in the annual statement. If changes are made the scheme administrator will need to be informed and member communications issued.
We are responding to the DWP's consultation paper. You can access the consultation paper here.