Of general interest are the DWP’s plans for charging structures in DC schemes used for auto-enrolment (qualifying schemes), on which we reported in both in our November 2014 update and our more detailedNovember 2014 briefing.

The Occupational Pension Schemes (Charges and Governance) Regulations 2015 have now been laid before Parliament, and include some changes from the earlier draft. The regulations are due to come into force on 6 April 2015, and the principal provisions include a charge cap of 0.75 per cent of funds under management in default arrangements of qualifying schemes used for auto-enrolment.

The most significant of the changes are highlighted below:

  • Money purchase AVCs - a member whose only contributions to money purchase benefits are AVCs, is not in a “default arrangement”, so the cap will not apply. A default arrangement is one into which 80 per cent of employees are actively contributing when the cap comes into force (or the employer’s staging date if later). However, where AVCs are invested in the same arrangement which is also used as a Qualifying Scheme for other employees, then the cap will apply to those AVCs.
  • Chair of Trustees and annual governance statement - there will be a requirement to appoint a Chair only where the scheme does not already have a Chair in place, including where the employer appointed the current Chair. There is a transitional arrangement whereby a scheme whose year end is less than 3 months after 6 April 2015, need not issue an annual governance statement until its 2016 year end. In these circumstances, its first annual governance statement will cover the whole period from 6 April 2015.
  • Verifying charge cap compliance - a new “prospective method” has been introduced by which the scheme trustees can verify compliance. Under this method it is assumed that there is no change to a member’s fund; the effect of the scheme’s charges is instead projected over the coming year, and the average of certain reference point values taken. Annual charges are divided by the average fund value, and that percentage must be lower than the charge cap.
  • Death benefits - costs which are solely associated with providing death benefits are excluded from the charge cap.
  • Schemes which include third party promises - some schemes may include a promise from a third party (for example an insurer) about a rate of income, or a lump sum, or minimum investment returns. Originally, such schemes were excluded from the charge cap, as the charge cap was not designed for them. Now, the exclusion has been tightened so that it applies only to a default arrangement which offers a third party promise. A third party promise in relation to a separate fund within the scheme will not exclude the default arrangement from the charge cap.
  • To help alert trustees and scheme managers to the new requirements, the Pensions Regulator had said that it will be publishing an essential guide later in February 2015 which will provide an overview of the new requirements that will affect many DC schemes. TPR plans to follow this up with more detailed guidance once the regulations have been made law in April 2015.
  • Now, the exclusion has been tightened so that it applies only to a default arrangement which offers a third party promise. A third party promise in relation to a separate fund within the scheme will not exclude the default arrangement from the charge cap.

To help alert trustees and scheme managers to the new requirements, the Pensions Regulator had said that it will be publishing an essential guide later in February 2015 which will provide an overview of the new requirements that will affect many DC schemes. TPR plans to follow this up with more detailed guidance once the regulations have been made law in April 2015.

Comment

The changes are mostly relaxations in response to comments from the pensions industry during the consultation process. They should make the new charge cap regime less burdensome on trustees and providers without reducing member protection.