Top of the agenda  

1. Finalised regulations on caps on charges and governance – trustees must ensure compliance

2. New draft flexibilities regulations – rule amendments may be required.


3. IBM v Dalgleish – the remedies judgment  


4. DWP paper on implementation of “pot follows member” transfers  

Top of the agenda  

1. Finalised regulations on caps on charges and governance – trustees must ensure compliance

The final version of the Occupational Pension Schemes (Charges and Governance) Regulations 2015 were laid before Parliament and are expected to come into force on 6 April 2015. The Regulations give effect to the Government’s measures in relation to caps on charges on default funds in DC auto-enrolment schemes and new governance requirements.

The charges cap

A cap on default funds in occupational DC schemes which are being used for auto-enrolment purposes will apply from 6 April 2015 or the date from which the scheme begins to be used as a “Qualifying Scheme” for auto-enrolment purposes, if later (“the implementation date”).

  • A “default arrangement” is widely defined, applying to investment options that perhaps would not normally be thought of as default funds. It is
  • a fund or funds where the member has not expressed a choice as to where his/hers contributions to the scheme are allocated.
  • an arrangement into which 80% of the employer’s workers are actively contributing on the ‘implementation date'. This is designed to be a one-off assessment at the relevant date, with no on-going requirement to monitor the proportion of active members in the given arrangement, which is likely to change over time. Effectively, this means that the fund will be treated as a default fund forever under the Regulations, even if members stop contributing to it or if it stops being used on a default basis.

an arrangement into which 80% of the employer’s workers who first made contributions after the implementation date are contributing. This will require trustees to monitor on an on-going basis the proportion of members investing into the various funds used by the employer to see whether any one arrangement meets this default fund definition at any point.

What charges does the cap apply to?

The cap applies to “member-borne deductions” (MBDs) but not to “transaction costs”.

Broadly, MBDs relate to the cost of administration (general scheme and investment administration) which can be identified in advance. It relates to services such as administering the pension scheme, keeping records, complying with regulations, communicating with members and designing the investment strategy.

Transaction costs on the other hand, are the variable trading costs a scheme incurs when buying, holding and selling underlying investments. These costs cannot be predicted at the beginning of a reporting period as they are dependent on the level and nature of trading undertaken by a scheme, (which in turn is influenced by market conditions). Transaction costs include brokerage fees, transaction taxes, e.g. stamp duty, and entry/exit fees for investments.

The cap limit

The cap applies at individual level. Two alternative limits apply:

  • A single charge structure limit - where the charge is calculated solely by reference to the member’s rights under the scheme. Such charges must not exceed 0.75% a year.
  • A combination charge structure limit - which is based mainly on the member’s rights under the scheme and either (1) a percentage of the value of contributions or (2) a flat fee. Detailed rules apply as to the amount of the cap for a combination charge structure.

Some exceptions from the requirements are, however, available, mainly where trustees have used their best endeavours to comply with the charges limit but have determined that they are “unlikely” to be able to comply or an event occurs outside their control.

Compliance and governance

The Regulations introduce new governance standards for occupational money purchase schemes. Trustees must:

  • Explain how their combined knowledge and understanding (together with advice available to them) enables them properly to exercise their functions and how their (existing) knowledge and understanding requirements under the Pensions Act 2004 have been met.

(Note: it was proposed at the consultation stage that each trustee be required to have, or have access to, all the knowledge and competencies required properly to run the scheme. This has been changed in the final regulations to a requirement that trustees as a whole have the requisite knowledge and competencies).

  • Assure themselves that core scheme financial transactions are processed promptly and accurately. “Core scheme financial transactions” include:  
    • investment of contributions;
    • switching between funds;
    • redirection of future contributions; and
    • transfers into or out of the scheme.
  • Consider whether the costs and charges borne by members represent “good value”. The value for money section of the DC regulatory guidance gives more details on how to assess good value.
  • Meet the new governance requirements for the scheme’s default arrangement(s) (which will include preparing a statement of investment principles for the default arrangement and ensuring that the strategy and performance are reviewed at least every three years).

(Note: the default arrangement is a slightly amended definition to the one that applies for the provisions relating to caps on charges and schemes to which contribuitions are no longer being paid are not exempt from these requirements).


The new governance provisions do not apply to AVCs in DB schemes (the Government expects that members will have made a choice to make AVCs, so will be more engaged and consequently an additional layer of governance would not be necessary). However, where a scheme provides AVCs and money purchase benefits, the new governance obligations will apply to the money purchase benefits and the AVCs.

Chair of trustees

There will be a statutory requirement for trustees of occupational pension schemes which provide money purchase benefits to appoint a Chair of trustees (this can be an individual or a professional trustee body or a director of a company that is not a professional trustee), where the scheme does not already have a Chair in place. The identity of the Chair will need to be submitted as part of the scheme return. The only additional duty which the Chair will have, over the duties of a trustee, will be to sign off on a Chair’s Statement on behalf of the trustees. Schemes are given three months from 6 April 2015 to appoint a chair and three months to replace a Chair who leaves office.

The Chair’s Statement

The Chair’s Statement, which has to be produced by the trustees, but signed by the Chair on their behalf, must be prepared annually, within 7 months of the end of the scheme year and included in the scheme’s annual report. The scheme return will also include statements about compliance with the requirement for a Chair’s Statement and compliance with the charges measures.

The Chair’s Statement must cover compliance with these new governance standards to be introduced from 6 April 2015 i.e. the governance requirements relating to default arrangement(s), core scheme financial transactions, charges and the knowledge requirements ( see above).

Additional “independence requirements” for certain multi-employer schemes

Additional governance requirements apply to ‘master trusts’. The term ‘master trusts’ is not used in the finalised regulations; instead the Regulations refer to a “relevant multi-employer scheme, which is a

  • scheme where some or all of the participating employers are not connected; or
  • which is promoted as a scheme where participating employers need not be connected.

The independence requirements include the requirement

  • Minimum of 3 trustees
  • Majority (including Chair) must be independent of service providers (such as advisory, investment, administration)
  • Independent trustees must be subject to limited term of 5 years (renewable, with a cumulative limit of 10 years)
  • Open and transparent appointment process

Public sector schemes set up under statute are given a temporary exemption to comply with the independence requirements (as the DWP recognises that such schemes may already have robust governance arrangements in place). There will be a consultation later in the year as to what governance arrangements should be imposed, if any, for such multi-employer schemes.

Active Member Discounts

An active member discount (AMD) is where a member who has ceased contributing, such as when they have moved to a different employer, is subject to a higher level of charge. AMDs will be banned for any member who makes a contribution to a qualifying scheme from April 2016. Between April 2015 and April 2016 they will be subject to the charge cap so that the higher rate of charges for deferred members will not be permitted to take the total charges over 0.75% for any member who ceases contributing in that period.

The measures are expected to come into force from 6 April 2015, apart from the full ban on active member discounts (AMDs) which will come into force on 6 April 2016.

Next steps

Trustees must take steps to ensure they comply with the new requirements in relation to governance and the Chair of trustees and AMDs.

They must ensure that the charges and default arrangements are below the cap and if they are not, take steps to reduce them. Where the default arrangement is above the cap, under the Regulations, trustees can write to the affected members and give them the choice of confirming in writing whether or not they want to remain in the high charging arrangement or have their future contributions moved to a default arrangement that is within the cap. Time however is short for trustees to conduct such communication exercises, given the charge cap measures have to be complied with from 6 April 2015. The Pensions Regulator has the power to issue compliance notices requiring corrective action to be taken and/or to issue penalty notices. Members may also be able to bring a claim against the trustees for the loss if they are charged a fee higher than the cap.

The FCA has published similar rules to the new governance requirements as applicable to workplace personal pension plans (i.e. Group Personal Pension Plans). It has not, as yet, finalised its rules on caps on charges, having consulted on these in October 2014. Employers may wish to check with the providers of their personal pension plans how they are proposing to comply with the FCA rules.

2. New draft flexibilities regulations – rule amendments may be required.

The DWP has issued three sets of draft regulations in relation to the flexibility regime, covering disclosure, the new transfer regime (to be introduced under the Pension Schemes Bill) and some miscellaneous amendments.

Disclosure regulations

Trustees are required to provide certain information to members as they approach age 55 (or meet the ill-health condition) relating to taking their benefits (the “Benefits information”) within 2 months of a request. This includes a statement:

  • of options available to member under the scheme rules;
  • that the member can transfer their benefit to one or more different providers who may offer different options, including the option to select an annuity;
  • that different options have different charges and tax implications

A copy of guidance prepared or approved by the Regulator that explains the options, or a statement that gives materially the same information as that guidance, should also be provided.

Certain information about the Government’s free guidance, namely that the guidance is available, how it may be accessed and that it is free and impartial. The statement should also inform the member that they should consider taking independent advice.

The scheme’s on-retirement communications must also signpost the member to the Government’s free guidance and the Benefits information unless it has been provided within the past 12 months.

Additional information is also required where the benefit is about to become payable to the person and to the personal representatives on the death of a member or beneficiary.

Transfer values

The regulations also, broadly, provide for amendments to the cash equivalent transfer legislation to reflect the Government’s proposals. These include in particular:

that where a member has transferable rights in relation to more than one category of benefit that the member’s cash equivalent statement of entitlement must set out a separate value in relation to each category

provision in relation to extension of the time to take a cash equivalent transfer and where the transfer value may be reduced.


Trustees are also given a statutory power to amend the scheme rules to offer some of the new flexible benefits, such as an uncrystallised funds pension lump sum (UFPLS) and flexi-access drawdown. Scheme employer(s) consent is required to the amendments.

Provisions are also made for a contracted-out scheme to pay a UFPLS.

Trustees are also given a modification power to amend the scheme rules to ensure they are not required to make a transfer under the rules, where under the Pension Schemes Bill provisions, they would not be required to process a DB to DC transfer, for instance, where they cannot confirm that the transferring member has received independent advice.


The regulations are still in draft and so changes may still be made to the details. Trustees and employer should consider how they apply to them and whether any rule amendments may be required to comply with them.

For further information, speak to you usual contact in the pensions team.


3. IBM v Dalgleish – the remedies judgment

The long-awaited remedies judgment in the case of IBM v Dalgleishwas handed down on Friday, 20 February. Considerably shorter than the liability judgment of April last year, the remedies judgment is nevertheless, in Warren J’s own concluding remarks, a “mammoth undertaking”. It covers the remedies potentially available to members of IBM’s pension plans who were affected by the “Project Waltz” changes but also the basis on which the trustees should administer the plans. The judgment also considers the procedures which IBM would need to follow if it sought to close the scheme to future accrual in the future. For our update on the decision, click here.  

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4. DWP paper on implementation of “pot follows member” transfers

In 2013, the DWP consulted on proposals for the automatic transfer of “small” defined contribution (DC) pots when an employee moves to another employer, to the new employer’s pension scheme. For our update on the consultation, click here. Provisions for regulations to be made setting out the detail of the regime were set out in the Pensions Act 2014 (but are not as yet in force).

The DWP has now produced a paper giving further details of the approach. Here are the key points from the paper:

  • The implementation of the automatic transfer of small pots will take place on a phased basis in order to ensure the smooth running of the transfers before rolling them out to all schemes.
  • The first phase will commence in October 2016 with a limited number of schemes being required to offer members the transfer of their pension pots on an opt-in basis. The government will choose the initial participants, aiming to provide high, not 100%, coverage.
  • The second phase will begin “as soon as is practicable” thereafter to include all other relevant schemes and will convert to working on an opt-out basis i.e. members will be transferred unless they choose to opt-out.
  • The key stages in the transfer process will be:
    • “Pot Flagging” whereby a scheme will be expected to identify dormant pots that fulfil the necessary legislative conditions;
    • “Pot Matching” where a scheme that has received a new member will search a register for other pots in that member’s name;
    • “Contacting the Member” to inform them that a previous pot has been found and informing them of the option for the pot to be transferred into their current scheme; and
    • “Pot Transfer” where the pot is transferred into the scheme that the member has joined.

The Government intends that members will only be transferred into “default arrangements” as defined by the Occupational Pension Schemes (Charges and Governance) Regulations 2015 (see above).


The Government intends to issue draft regulations later this year setting out the framework for the regime.