The DWP has recently announced the outcome of last autumn’s consultation on the banning of member-borne commission in money purchase workplace pension schemes. Whilst the primary burden under the new regulations will fall on service providers, trustees of affected schemes should note that they will also be subject to new duties from 6 April this year.
The DWP’s announcement is part of the Government’s wider ongoing drive to ensure that the success of automatic enrolment in improving retirement provision is not undermined by unfair or excessive charges on members. Regulations have already been made to control direct charges, in the form of the charge cap of 0.75% on default funds in automatic enrolment qualifying schemes. A ban on active member discounts will also apply from 6 April this year.
Separately, in the area of personal pensions, the FCA has been taking steps since 2012 to prevent advisers from being remunerated in the form of commission, starting with the implementation of the Retail Distribution Review. The FCA consulted in 2014 on rules to ban existing commission arrangements which were not caught by the Retail Distribution Review, and those rules will again come into force in April 2016.
The missing piece of the jigsaw is the practice of charging adviser commission to members under occupational pension schemes, and it is this area which is covered by the recent announcement. A set of draft regulations which give effect to the Government’s policy has been published alongside the announcement, and these regulations will be subject to a very short further period of consultation (ending on 9 February) in order to enable the ban to come into force on 6 April.
Which schemes / members are covered?
In broad terms, the policy approach set out in the original consultation remains unchanged. Key points to note are:
- The ban will apply to occupational pension schemes that provide money purchase benefits and are used as a qualifying scheme for automatic enrolment in relation to at least one jobholder.
- The ban will cover all money purchase benefits in the qualifying scheme, not just those which are part of the default arrangement. In this respect, these protections are wider than those offered by the charge cap provisions. In particular, the ban will apply to AVCs under a qualifying defined benefit scheme where those AVCs are used to provide money purchase benefits, even if the AVCs are the only form of money purchase benefit under the scheme.
- As with the charge cap provisions, the ban does not cover certain small schemes, such as small self-administered schemes, executive pension plans and single-member schemes; and members will be entitled to opt in to services for which commission is levied, subject to certain conditions.
- Once a scheme is covered by the ban it will remain subject to it thereafter, even if the scheme ceases to be used as a qualifying scheme. Again, this is the same approach as has been taken with the charge cap provisions.
- Members, whether active or deferred, who are, or were, employed by the employer who is using the scheme as a qualifying scheme for automatic enrolment will be protected by the ban. In particular, it should be noted that the ban will cover individuals who became deferred members before the ban came into force, or even before the scheme was first used as a qualifying scheme for auto-enrolment. This is materially wider than the protection under either the charge cap provisions or the active member discount ban.
- Multi-employer schemes will be covered on a ‘per employer’ basis, regardless of whether the scheme is sectionalised. So, where employer A uses the scheme as a qualifying scheme for auto-enrolment but employer B does not, only active and deferred members of employer A will be covered by the ban.
What are the new requirements?
The primary obligation to comply with the ban will rest on service providers, who will be required to ensure that charges are not levied on protected members in order to fund (whether directly or indirectly) commission payments to advisers for advice or services provided to employers or members.
The ban does not cover charges relating to the provision of advice or services to the trustees in relation to the scheme; and (unlike the FCA’s rules for personal pensions), it is not an outright ban on commission being paid by service providers to advisers, providing the cost is not passed on to members.
“Service providers” are defined as parties directly supplying administration services to the trustees. The ban will also apply to what the Government terms “integrated service providers” – that is, a single firm or corporate group which supplies both administration and other services. However, in a change from the original proposals, asset managers will not be caught.
Trustees’ duties are more limited, but they will have a fundamental obligation to kick-start the process of removal of commission arrangements by confirming to their scheme’s service provider(s) that the scheme is used as a qualifying scheme.
In addition, trustees will have a duty to confirm to the service provider (on request) which deferred members are covered by the ban. In practice, this is likely to be of relevance primarily in relation to multi-employer schemes where some, but not all, employers are using the scheme as a qualifying scheme.
There are set time-limits for compliance with these new duties:
- Trustees have three months in which to notify the service provider that the scheme is being used an auto-enrolment qualifying scheme, starting from the latest of 6 April 2016, the date of appointment of the service provider, and the date the scheme starts to be used as a qualifying scheme.
- Service providers have one month from the date of the trustees’ notification to comply with the ban, and then a further one-month period within which to notify the trustees that they have complied.
Enforcement, reporting and transitional arrangements
Enforcement of the ban will be the responsibility of the Pensions Regulator, so this represents a one-off extension of TPR’s remit to include service providers (who would normally be regulated by the FCA, in most cases). To enable TPR to police non-compliance, trustees will be required to state in their scheme return whether or not the service provider has confirmed to them that it has complied with its duty as regards the ban.
The provisions are being phased in. Initially, the ban will apply only to new commission arrangements or to variations / renewals of existing arrangements; regulations will be issued later in 2016 regarding the application of the ban to all existing arrangements.
The Government recognises that existing charge rates may reflect commission arrangements which will have to be removed once the ban is fully in force, or may have been set at a level which is intended to enable service providers to recoup the cost of initial commission which has already been paid before the ban comes into force. Where this is the case, the Government is not (at this stage) proposing to require those charges to be reduced – but there is a threat to do so in future if there is evidence that members are not benefiting from the removal of commission arrangements.
Trustees will no doubt be relieved that the additional governance burdens to be imposed upon them under this legislation will be fairly limited: at the consultation stage, there was a realistic possibility that trustees might have been made subject to the primary duty to eradicate commission arrangements, which would have created material practical difficulties.
However, the different (and wider) scope of the proposed new protection has the potential to create confusion, when compared with the charge cap and active member discount provisions.
In some cases (for instance, where the scheme is a defined benefit scheme with money purchase AVCs), trustees will not necessarily know whether particular employers are using their scheme as a qualifying scheme, and may therefore need to obtain confirmation from their scheme employers ahead of 6 April, so that they can provide the required notification to their service provider(s). They will also need to ensure that they correctly identify each person or firm which falls within the definition of “service provider” in respect of the scheme.