Application to occupational pension schemes 

In our June 2014 edition of Pensions Pieces, we outlined certain proposals being consulted on by the DWP with regard to scheme charges and trustee/governance structure for schemes that provide defined contribution benefits. The framework for the new laws was introduced in the Pensions Act 2014. New regulations1 to implement the detailed changes have now been introduced in relation to occupational pension schemes. The majority of the new requirements will come into effect on 6th April 2015. Some relate only to qualifying pension schemes used for auto enrolment purposes, others to all arrangements providing defined contribution benefits.

Summary

In brief, the following requirements are being introduced for defined contribution benefits under occupational pension schemes (other than SSASs), including master trusts. The same charge caps will also apply for contract based schemes (see FCA Personal Pension Schemes (Restrictions on Charges) Instrument 2015) although this article does not cover those. For both occupational and contract  based schemes, the obligation is on the trustees/provider (as applicable).  The new laws do not put a responsibility on the employer to monitor compliance:

From 6 April 2015

  • charges in defined contribution default arrangements used for automatic enrolment will be capped;
  • scheme provisions restricting the trustees to a particular service provider will be prohibited.  Enabling powers will allow trustees to amend schemes by resolution to remove such provisions;
  • schemes must appoint a chair of the trustees. In the case of a sole corporate trustee that is a professional trustee, the sole corporate trustee itself will be deemed to be the chair; and
  • various reporting requirements are being introduced regarding the investment of default funds and the charges that apply within them.

From 6 April 2016

  • active member discounts (the practice of charging deferred members more than active members) will be prohibited from 6 April 2016 for members who become deferred from that date.

Trustees are likely to need to make certain changes to ensure that they will comply with the new requirements, and there is a tight timescale for trustees to achieve this. Suggested action points for trustees are included in the box with further details of the requirements below.

Actions for trustees of schemes with money purchase benefits to take: auto enrolment qualifying pension schemes only, save where otherwise stated

Investments

  • Identify which fund (or funds) will be classified as a  "default arrangement".  
  • Check that there is sufficient oversight of the default arrangement on an ongoing basis.  
  • Consider what steps could be taken in the event that the fund in place becomes unsuitable (would the rules of the scheme enable the trustees to move the existing default fund members into another fund without their consent?).  
  • Put in place a statement of the aims, objectives and policies of the trustees in respect of the default arrangement (including the kinds of investments held, risks and how they are measured and managed). Update the SIP to cover these areas.

Administration

(In relation to money purchase benefits in general), and not only qualifying pension schemes used for auto enrolment)   

  • Appoint a trustee chair.  
  • Check pension scheme documentation to ensure that the trust deed and rules do not specify particular investments or investment/administration providers.  
  • Check arrangements for core financial transactions in relation to money purchase benefits (including investment of contributions, transfers in and out, switching between different investments and payments out from the scheme) are in place to enable them to be processed promptly and accurately.  
  • Consider whether the trustee board has the requisite skills, knowledge and understanding (taking into account the advice available).  Catch up with knowledge and understanding requirements – now may be a good time to attend some training courses!

Costs and charges

Default arrangements

  • Ensure that the charging structure for default arrangements will be permitted from 6 April 2015, and make changes if not.  
  • Check when the charges year for default arrangements will start and assess whether the charges will fall under the applicable charge cap.   
  • If charges under default arrangements are too high, use best endeavours to reduce them so that they will fall under the cap.  

Money purchase benefits in general (not only qualifying pension schemes used for auto enrolment)

  • Calculate the applicable charges and (so far as possible) the transaction costs borne by members and assess whether they represent "good value" for members.

Charge caps for default arrangements

Charge caps are being introduced for money purchase default arrangements under qualifying schemes used for auto enrolment from 6 April 2015.  These caps relate to all administration charges under the scheme, other than:

  • transaction costs (incurred as a result of the buying, selling, lending or borrowing of investments);  
  • costs that a court provides that trustees may recover;  
  • charges permitted by law in respect of pension sharing on divorce;  
  • winding up costs; and  
  • costs solely associated with the provision of death benefits.

What charge caps apply?

In general, money purchase default arrangements (as described above) under qualifying schemes used for auto enrolment may only operate one of the two following charge structures from 6 April 2015: 

  1. A single charge structure, where charges are calculated solely by reference to the value of the member's rights under the scheme, capped at 0.75% annually of the value of the member's rights under the default arrangement; or
  2. A combination charge structure, where charges are calculated by reference to the value of the member's rights under the scheme (see column A in the table below, referred to as an "existing rights charge") together with either:  
    1. a percentage of the value of contributions (see column B in the table below); or  
    2. a flat fee (see column C in the table below).  

If a combination charge structure is applied, schemes have the following charge cap options, combining the charge in column A with the corresponding charge in either of columns B or C:

Click here to view the table.

Schemes cannot change the charge structure or the type of combination charge structure during a "charges year", being a period of 12 months specified in any scheme document or, if no such period is specified, a period beginning on either 1st or 6th April as the trustees or managers decide.  If no decision is made, the "charges year" will begin on 1st April.

What is a default arrangement for the purposes of the charge caps?

Default arrangements include the following three categories of money purchase fund, in a "qualifying scheme" that is used for auto enrolment for at least one worker:

  1. any fund to which contributions are allocated without the worker having expressed a choice (note that the fund will continue to be classified as a default arrangement even if future contributions are directed to a different fund);  
  2. any fund to which the contributions of 80% or more of the workers then contributing to the scheme (ignoring any AVC contributions) were allocated, on the later of 6 April 2015 and the employer's staging date for auto enrolment, UNLESS before that date:  
    • the worker actively agreed in writing to stay in the original fund, including a statement acknowledging that charges under the original fund may be higher than would otherwise be permitted by law; and  
    • the worker actively agreed in writing to stay in the original fund, including a statement acknowledging that charges under the original fund may be higher than would otherwise be permitted by law; and  
    • any worker who did not actively agree in writing to remain in the fund as described above was automatically transferred into a fund that met the charge cap restrictions; and  
  3. any fund which first receives contributions from workers after the later of 6 April 2015 and the employer's staging date for auto enrolment, under which, at any point after that date, the contributions of 80% or more of the workers then contributing (ignoring any AVC contributions) are allocated, where those workers are required to make a choice as to where their contributions are allocated.

Exceptions to the charge cap

Schemes can charge over the limits set in the cap under certain circumstances.  These apply, subject to various conditions, where (broadly):

  • members agree to an additional charge being levied in relation to a service which the scheme is not required to provide in any event; or  
  • the scheme is unable to abide by the charge cap despite the trustees having used their best endeavours to comply. 

Active member discounts/increased charges for deferred members

From 6 April 2016, schemes used for automatic enrolment will not be able to charge deferred members at a higher rate (or, if there is a fixed charge, a higher amount) than active members, in relation to money purchase benefits. This restriction applies in relation to members who have made contributions to the scheme on or after 6 April 2016, whilst the scheme was being used as a "qualifying scheme" for the automatic enrolment requirements by the member's employer. This means that current deferred members who became deferred before 6 April 2016 will not benefit from the change.

Independence in appointment of service providers

From 6 April 2015, in relation to money purchase benefits, it will not be permitted for the trustees to be restricted in their choice of administrative, fund management, advisory or other service in respect of the scheme.  Where the trust deed or scheme rules contain a provision restricting the trustees' choice, this must be removed, and until it is removed, it will be overridden by law and so will cease to apply.

Note that, unlike the charge caps, this restriction is not limited to qualifying schemes used for automatic enrolment but applies generally to occupational schemes in respect of money purchase benefits2.

Appointment of a chair of trustees

From 6 April 2015, there will be a new requirement for trustee boards of occupational schemes with money purchase benefits to appoint a chair of the trustees.  The chair can be an individual trustee or a corporate trustee.  Where there is a sole corporate trustee that is not a professional trustee, the chair must be a director of that trustee company.  Where there is a sole professional corporate trustee, the trustee company itself will be the chair. 

The first chair must be appointed within three months of 6 April 2015, or the date on which the scheme is established, if later.

The chair of trustees will be required to sign off on certain reporting requirements.

New reporting and administrative obligations

Addition to Statement of Investment Principles regarding default arrangements

From 6 April 2015, the statement of investment principles must include a statement specifically in relation to the default arrangement (see above for an explanation of the term "default arrangement"), covering the following:

  • the aims and objectives of the trustees in respect of the default arrangement investments;  
  • their policies in relation to the default arrangement, including the kinds of investments held, risks, including how they are measured and managed, the expected returns and realisation of investments; and  
  • an explanation of how the aims and objectives and policies are intended to ensure that assets are invested in the best interests of the members and beneficiaries.

The trustees are required to review the three factors above at least every three years (or without delay if there is a significant change in the investment policy of the demographic profile of fund members). 

Annual statement

A requirement has been added into the Scheme Administration Regulations for the trustees to prepare an annual statement in relation to the governance of money purchase benefits under occupational schemes over the scheme year.   

This applies in respect of the time period on and after 6 April 2015 (and so the required reporting will relate to a partial scheme year if the scheme year ends before 5 April 2016).  If the partial scheme year being reported on is less than three months, the relevant information must be carried over and reported on at the end of the following scheme year.

The statement must be prepared within seven months of the end of each scheme year, and must include the following:

In relation to the default arrangement (see above for an explanation of the term "default arrangement")

  • the latest statement regarding the default arrangement in the statement of investment principles (see above);  
  • a description of any review undertaken during the scheme year in relation to the investment of the default fund;  
  • an explanation of any changes resulting from that review; and  
  • where no review was undertaken during the scheme year, the date of the last review.

In relation to all money purchase benefits

  • a description of how the requirements for processing financial transactions (see further below) have been met during the scheme year;  
  • specified information about charges and transaction costs; and  
  • a description of how the trustee knowledge and understanding requirements have been met during the scheme year, and an explanation of how the combined knowledge and understanding of the trustees, together with the advice available to them, enables them properly to exercise their functions as trustees.

  The annual statement must then be signed on behalf of the trustees by the chair of the trustees.

Requirements for processing financial transactions

The trustees must secure that core financial transactions in relation to money purchase benefits, including but not limited to:

  • investment of contributions;  
  • transfers of assets relating to members into and out of the scheme;  
  • transfers of assets relating to members between different investments within the scheme; and  
  • payments from the scheme to or in respect of members,

are processed promptly and accurately. 

Assessment of charges and costs

In relation to money purchase benefits, the trustees must, at intervals of no more than one year, calculate the charges and (so far as they are able to do so) the transaction costs borne by members of the scheme, and assess the extent to which these charges and transaction costs represent "good value for members".

Additional requirements for Master Trusts

The following additional requirements apply to multi-employer schemes where (broadly) not all the employers are in the same corporate group, or which are promoted as schemes where participating employers need not be in the same corporate group.

Structure of trustee board

The trustee board (if made up of individual trustees) must be constituted as follows:

  • at least three trustees;  
  • a majority of whom, including the chair, must be "non-affiliated" (meaning independent of any organisation which provides advisory, administration, investment or other services to the scheme, see further below for how they must be appointed); and  
  • the chair must be consulted on the appointment of new trustees.

The above requirements also apply where there is a non-professional corporate trustee, as if the directors were individual trustees.  (It seems from the current drafting that a sole professional trustee will not be sufficient, although a professional trustee could form part of the trustee board).

Where a trustee/director retires, or a trustee/director ceases to be non-affiliated, the requirements above must be satisfied within three months.

Appointment of non-affiliated trustees

The appointment process is required to be "open and transparent", which would include (but is stated not to be limited to):

  • advertisement in at least one appropriate national publication;  
  • engagement of a recruitment agency to assist in the selection of candidates; or  
  • a nomination and selection process that complies with the MNT/MND nomination and selection requirements.

When it is decided whether the person appointed as a result of the process is in fact non-affiliated, the following must be taken into account:

  • whether the person is a director, manager, partner or employee of a "service provider" (an organisation which provides advisory, administration, investment or other services in respect of the scheme), or has been in such a position in the past five years;  
  • whether the person receives any payment or benefit from such a service provider; and  
  • whether the person's obligations to the service provider conflict with their obligations as a trustee, and whether their obligations as a trustee would take priority in such an event.

There are limits on for how long a trustee or director of a corporate trustee can be classified as non-affiliated. A trustee or director who is an individual cannot count as non-affiliated for any continuous period of more than five years, or more than ten years in total (unless there has been a five year gap since the trustee /director last held office in relation to the scheme in question). 

Where the non-affiliated trustee is a professional trustee body:

  • it cannot count as non-affiliated for any one period of more than five years;  
  • a nominated individual must act as its representative; and  
  • the nominated individual cannot act as its representative for more than ten years in total.

Representation of members

The trustees of a master trust must make arrangements to encourage members of the scheme or their representatives to make their views known to the trustees.

Annual statement

Master trusts must complete additional sections of the annual statement, including the following:

  • how the requirements for the majority of the trustees and chair of the trustees to be non-affiliated have been met during the year;  
  • where a trustee who is non-affiliated was appointed during the year, how the requirements for an open and transparent appointment process were met; and  
  • details of arrangements in place to seek the views of members.