The statutory regime covering workplace pensions will be transformed in April 2015. This is the culmination of sweeping reforms to defined contribution (DC) pensions aimed at providing savers with flexible access to their pension savings and changes to the DC governance and charges regime.
In this third alert in our four-part series on the reforms, our pensions experts examine the impact for the DC governance and charges regime. Our final alert this week will turn to focus on the implications for workplace pension reform.
DC occupational schemes
Charges and governance
These reforms focus on how DC schemes are governed, how they will report their compliance with the governance regime, the charges that are borne with members and what members need to be told about these charges.
To help those involved with running DC occupational pension schemes work out, firstly, whether the new charges and governance regime will apply to them and, secondly, whether they will be able to comply or what changes they need to make, we've set out the following key questions to consider.
1. Will the new governance regime apply to your scheme?
The new regime will apply to most DC occupational pension schemes. There are exceptions covering certain types of DC schemes (e.g. some small self-administered schemes, single member schemes, executive pension schemes and public service pension schemes).
The government is currently consulting on a technical amendment to clarify the position in relation to DB schemes which only provide DC benefits through AVCs. It is expected that such arrangements will be exempt from the new governance requirements unless the arrangement is also used as a 'default arrangement' (see question 1 in the charges section below) for other members.
There are additional governance requirements that apply to 'relevant multi-employer schemes'. These additional requirements are aimed at ensuring that master trusts have even higher standards of governance, because of the drafting of the legislation, they could apply to other multi-employer schemes in certain circumstances (e.g. if participating employers in a multi-employer scheme are no longer connected to the scheme's principal employer).
If you are unsure as to whether the regime applies to your scheme and would like help, please contact a member of the Pensions team.
2. Does your scheme have a chair of trustees?
A chair is required to sign-off an annual statement confirming compliance with the new governance regime. Most DC occupational pension schemes will already have a chair and they can continue in this role if they want to. Schemes will have three months from 6 April 2015 in which to appoint a chair if they do not already have one.
3. Will your chair be able to sign the annual statement?
To be able to produce and sign the annual statement in full compliance with the new regime, the trustees will need to:
- prepare and keep under review a statement of investment principles governing decisions about investments for the purposes of the default arrangement. A copy of the statement of investment principles must be included with the annual statement. The annual statement must also include details of any review and changes to the statement of investment principles. If no review took place in the scheme year, the annual statement must provide the date of the last review.
- consider discussing the new requirements with the scheme's investment consultants to ensure that trustees have support when preparing and reviewing the scheme's statement of investment principles.
- determine whether 'core scheme financial transactions' are being processed promptly and accurately. These will need to be documented in the annual statement. Core scheme financial transactions include investment of contributions, processing transfers in and out and making payments to members.
- calculate the scheme's level of charges and transaction costs that are borne by the member and consider whether they represent good value for money. The trustees must set out their assessment in the annual statement. The statement must also state the level of charges and transaction costs in the scheme's default arrangement and other funds.
- focus on trustee knowledge and understanding. The annual statement will need to confirm whether this duty has been satisfied in the scheme year.
4. Do you know the time limit for producing the annual statement for your scheme?
The annual statement must be produced within seven months of the end of the scheme year. A transitional measure applies so that, if the period between 6 April 2015 and the end of the scheme year is less than three months, the annual statement can be produced within seven months of the end of the next scheme year. This will cover a longer period than normal (i.e. from 6 April 2015 to the end of the second scheme year).
1. Will the DC charges cap apply to your scheme?
The DC charges cap will apply to 'default arrangements' of all DC occupational pension schemes (subject to exceptions covering specified types of DC schemes, which include some small self-administered schemes, single member schemes, individual personal pension schemes, executive pension schemes and certain DC defined ambition schemes). The definition of "default arrangement" is wider than you might think. For further details see question two below.
The Government is consulting on a change to the legislation so that the charges cap will only apply to AVCs if the AVC arrangement is also used as a 'default arrangement' for other workers of that employer. Please discuss this with a member of the Pensions team if this applies to your scheme.
2. Do you know what your scheme's 'default arrangements' are?
Default arrangements are those which:
- are used by a 'qualifying scheme' (i.e. a scheme that is used to discharge an employer's duties under workplace pension reform); and
- meet at least one of the following three tests:
- an arrangement into which workers' contributions are directed without the worker having to make an active choice (e.g. an automatic enrolment scheme);
- an arrangement to which at least 80% of an employer's workers actively contribute on whichever date is the later of 6 April 2015 and the employer's staging date; or
- an arrangement which:
- received its first workers' contributions after 6 April 2015;
- required members to make a choice for which arrangements their contributions should be allocated to; and
- has contributions of at least 80% of the employer's workers allocated to it.
The first test covers "true" defaults where the member has not made an active choice. The second and third tests are designed to capture schemes using contractual enrolment and pre-automatic enrolment schemes that had member choice but which, in reality, resulted in most members 'choosing' a single arrangement.
An interesting issue arises if a member originally made an active fund choice, but has been "mapped" to a similar fund without expressing a choice. Is their new arrangement a default arrangement? Please let us know if this is relevant to you and you would like advice on this point.
3. Will your 'default arrangements' meet the charges cap?
The charges cap is 0.75% of the value of funds under management.
If the 'default arrangement' is a group of funds, a component fund's charge may exceed 0.75% as long as the arrangement's overall charge does not exceed 0.75%.
Costs and charges are not always as clear as a simple percentage and so you are likely to need to take professional advice and test your specific charging structures against the cap.
The charges cap will apply from whichever date is the later of:
- 6 April 2015; and
- the date the scheme is first used as a 'qualifying scheme'.
It will apply to active members and deferred members whose last contribution was after 5 April 2015 and whose funds are invested in the 'default arrangement'.
If the cap isn't met, the trustees must ensure compliance by:
- changing the charging structure so that the cap is met;
- moving members to an alternative compliant fund;
- telling employers to re-enrol jobholders into an alternative and compliant qualifying scheme; or
- making use of a transitional period that applies to October 2015 if the trustees believe that the arrangements can be made compliant by October 2015.