The Government has confirmed another round of pension reforms applying to auto-enrolment schemes, capping management charges, requiring contract-based schemes to have an independent governance committee and banning active member discounts, all with effect from April 2015.
Additionally the Government will be introducing an absolute ban on taking sales commission charges associated with putting in place a new pension scheme directly from member pots with effect from April 2016.
What has the Government said it will do?
In a Parliamentary statement from the Minister for Pensions, the Government has confirmed that it will take a number of steps that it had previously consulted on.
- Introducing an annual management (AMC) cap of 0.75 per cent for auto-enrolment scheme default funds. There will be some leeway for schemes that, like NEST, charge an initial fee and an annual management charge. The Government has provided a table to convert these two elements into a single AMC equivalent.
- Although transaction fees are excluded from the AMC cap for now, schemes (including the trustees of occupational pension schemes) will have a legal duty to obtain and provide members with transparent transaction cost information.
- Contract-based schemes will be expected to put in place an independent governance committee to make sure their default funds are appropriate and they are offering good value for money to their members.
- Active member discounts whereby workers paying into a scheme are given lower management charges than those who have stopped paying into the scheme will be banned.
- These changes will take effect from April 2015. The Government will review the AMC cap, and the way it is calculated, in 2017 to confirm whether it is working as intended, including the transactions cost exemption.
A ban on sales commission being taken direct from member pots will (as noted above) take effect from April 2016.
These changes have been in the pipeline for some time but may have a big impact on some companies that have already put in place their auto-enrolment solutions.
The Government consulted on a potential charges cap and banning active member discounts last year, and the policy has broad approval across the political spectrum. The main argument on the cap is when it should be effective from rather than whether it is a sensible policy. The independent governance committee requirement comes out of an OFT report that showed that the existing governance provisions for older pension schemes and for contract-based schemes generally were not protecting members adequately.
What do I need to do about these changes?
If you are an employer with an auto-enrolment scheme you should review default fund AMC for your scheme. This is vital as the most likely way the Government will put in place the cap will be to state in legislation that a scheme with an AMC over the cap is not a qualifying scheme for auto-enrolment. This could leave you needing to find a replacement scheme fast if you cannot renegotiate a lower annual management charge with your provider or trustees or, in the alternative, face fines for non-compliance with the auto-enrolment legislation.
The ban on active member discounts is another worry for employers. Most group personal pensions include some form of active member discount and the charges will be hardwired into the contracts they have with their providers. Employers should review their contracts to confirm whether they have such a scheme. If so, they should check whether their contract includes a change in law provision that could be used to trigger a renegotiation, or an option to end the contract early should the provider refuse to change the terms.
Even where it is possible to remove active member discounts, the end result may be higher AMCs across the board to reflect the blended costs associated with a mix of active and administratively more expensive deferred members. This will require careful communication to members who will not be pleased to see their AMCs increased.
Employers with contract-based schemes should also confirm that their providers are making progress to put in place an independent governance committee by the April 2015 deadline. In the interim we think it good practice for employers to have their own internal committee reviewing the value for money and default funds of their current provider.