Summary

The Department for Work and Pensions (DWP) has published a paper entitled “Better workplace pensions: Putting savers’ interests first”.  This contains the Government’s response to an earlier consultation.  It also consults on draft regulations concerning the governance of workplace money purchase pension schemes (WPPs), as well as the introduction of a 0.75% charge cap on default funds. The consultation closes on 14 November 2014. 

Background

The latest paper follows a consultation launched in March 2014, in which the DWP consulted on a 0.75% charge cap and a ban on inappropriate charges, and minimum governance standards were first proposed for WPPs.  

The latest paper builds on the earlier document by:

  • setting out the Government’s proposed approach on various elements of governance;
  • setting out in greater detail how it sees the charge cap working (including a ban on active member discounts);
  • proposing requirements for greater transparency in workplace pension schemes; and
  • suggesting new enforcement powers for the Pensions Regulator.

The consultation applies to money purchase occupational schemes.  The DWP does not regulate personal pension schemes, but the Financial Conduct Authority (FCA) has launched a separate consultation proposing the introduction of requirements for workplace personal pensions, such as group personal pension plans, that are similar in relation to the charge cap (including the ban on active member discounts).  The FCA consultation closes on 31 December 2014.      

Governance

New quality standards will apply across all WPPs, and money purchase sections of hybrid schemes, with effect from April 2015.  Trustees will be obliged to:

  • design default arrangements in members’ best interests, with a written statement of aims, objective and policies in relation to investments and an explanation of how these are in members’ best interests; trustees must also keep such arrangements under regular review;
  • ensure that core financial transactions (e.g. relating to the investment of contributions, switches of investments and transfers) are processed promptly and accurately; and
  • assess the extent to which the costs and charges borne by members represent good value.

The Chair of trustees will be obliged to issue a regular Chair’s Statement reporting on reviews of investment strategy and assessments of the value of costs and charges.   These obligations will be backed up by new enforcement powers for the Pensions Regulator – see below.

Provisions in scheme rules that require trustees to use a particular provider for administrative, fund management, advisory or other services will no longer be allowed. 

There are also additional requirements that will apply to all “master trust” arrangements (defined as multi-employer occupational schemes, where at least some of the employers are not associated).  These will be obliged to have a minimum of three trustees, the majority of whom – including the Chair – must be independent of any company that provides advisory, administration, investment or other services to the master trust.  

Charge cap

The 0.75% annual cap on charges in relation to funds under management applies to the default funds of “qualifying schemes” (i.e. schemes that employers use to satisfy their auto-enrolment obligations).  This will apply from April 2015 to all member-borne charges and deductions, excluding transaction costs. 

Active member discounts (AMDs) will not be permitted from April 2016, so members must not be charged more after they cease contributing than they would if they were still making contributions to a scheme.   T

he Government is proposing (subject to consultation) that:

  • responsibility for ensuring that a default fund is complying with this requirement will rest with trustees, i.e. it will be incumbent on trustees to ensure that the default funds offered by their schemes comply with these requirements;
  • the duty will apply to both (a) any arrangement into which contributions are directed without a member having made an active choice, and (b) any arrangement into which 80% of an employer’s workers are contributing;
  • the cap should apply to all funds under management (not just those built up since a certain date, e.g. April 2015 or an employer’s staging date);
  • the cap should apply to a member’s funds in a qualifying scheme in aggregate (so that if, say, fees are calculated using a dual charging structure, the aggregate charge is 0.75%); and
  • employers should still be allowed to subsidise member charges on behalf of current employees without breaching the rule against AMDs, as long as the total charge level imposed on a fund is the same for contributing and non-contributing members.

Transparency of charges

From April 2015, trustees and independent governance committees will be required to report on costs and charges.  The Government sees this as important for improving transparency, so that it can effectively review the default arrangement charge cap, as it is planning to do in 2017.  

Regulatory approach and enforcement

The Government is proposing to add three further items to the list of registrable information that an affected scheme is required to send to the Pensions Regulator as part of its scheme return:

  • the name of the Chair of trustees;
  • whether he or she has produced the Chair’s Statement (including the governance information referred to above);
  • whether a scheme complies with the default arrangement charge cap of 0.75% of funds under management (from April 2015), and whether it complies with the measure banning AMDs (from April 2016).

There would be a fine of £500 to £2,000 for failure to comply with the Chair’s Statement requirement. 

Where trustees become aware that the charge cap will not be complied with, the Government is proposing that trustees should be able to invoke an “adjustment measure” to ensure compliance with the cap, including (for example) the ability to divert contributions to a fund that complies with the cap.  

Comment

Trustees of WPPs, and other affected industry professionals, should consider the proposals summarised above and, if they wish, respond to the consultation within the Government’s 14 November deadline.

Assuming the proposals are adopted in their current form, in order to comply (and demonstrate compliance) with them trustees will need to review their administration and governance structures to ensure that they are robust.  

Trustees should be aware of the total fund charges that apply to their default funds (including funds in which 80% of members’ contributions are invested, as well as those into which contributions are automatically directed).  Where these exceed the 0.75% cap, trustees should consider what changes they need to make.   

In particular, the requirement for schemes to have a Chair of trustees, with specific statutory responsibilities, is new.  Not all schemes will currently have a permanently appointed Chair, so it would be sensible for trustees of these schemes to start identifying suitable candidates.