Your World First
CMS Clarity Guides Law. Tax
Number 24: DC Governance
From 6 April 2015, charges imposed in relation to default arrangements in schemes used for auto enrolment purposes were capped. The charge cap applies at
individual member level so it cannot be smoothed across the default arrangement as a whole. There are three options; a charge of no more than 0.75%; a
combination of a charge on contributions plus a percentage of funds under management; or a combination of a flat annual fee plus a percentage of funds
Members' written consent must be obtained for any higher charges. The charge cap applies to costs and charges associated with scheme and investment
administration but it excludes transaction costs, winding up costs, pensions sharing costs and costs associated with death in service benefits. Trustees must
confirm each year that they have complied with the charge cap in relation to all relevant members and tPR can impose a fine of up to £5,000 on an individual
trustee (£50,000 for a corporate trustee) for non compliance.
From 6 April 2016, trustees of money purchase schemes used for auto enrolment (including those where AVCs are the only money purchase benefits) may not
impose (or permit to be imposed), charges on a non-contributing member which are higher than those which would have been imposed had the member been a
contributing member. This applied only to those members that were active members on or after 6 April 2016 and who subsequently become deferred members.
Similar rules were introduced by the Financial Conduct Authority in relation to personal pension schemes.
From 6 April 2016, a ban on member borne commission and the variation of any existing member borne commission arrangements was introduced. This applies
to occupational pension schemes used as qualifying pension schemes for auto enrolment, even if the only money purchase benefits are AVCs and if the scheme
ceases to be used for auto enrolment. It applies to all members of the scheme but in a multi-employer scheme it only applies to current and former employees of
those employers using the scheme for auto enrolment purposes.
TPR published an updated DC Code of practice in July 2016. The DC Code is relevant for all occupational DC arrangements, including those arrangements where
the only DC benefits are AVCs. The DC Code is supported by guidance from tPR on good practice in relation to six main areas: the trustee board; scheme
management skills; administration; investment governance; value for members; and communicating and reporting.
From 31 March 2017, early exit charges are capped at 1% of the value of existing contract-based personal pensions, including workplace personal pensions. Early
exit charges that are currently set at less than 1% may not be increased. The cap applies to members who leave after age 55. It does not apply to administration
charges or market value adjustments. No early exit charges are permitted on personal pension contracts entered into after 31 March 2017. The early exit cap is
due to apply to occupational pension schemes with effect from 1 October 2017.
DC Code of Practice
and Guidance I Contact Sharon Piert of Counsel
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© CMS Cameron McKenna Nabarro Olswang LLP 2017. 1705-0014468-5
Your World First
CMS Clarity Guides Law. Tax
Number 24: DC Governance
Welcome to our twenty fourth Clarity Guide. On 1 May 2017, CMS combined with Nabarro and Olswang. This transformational combination of three leading
brands creates a modern, future-facing law firm that combines scale with an exceptional depth of sector expertise; a firm that is united in its focus on clients.
The Nabarro Clarity Guides are renamed the CMS Clarity Guides.
The governance requirements relating to both trust-based and contract-based arrangements providing money purchase benefits have increased significantly in
recent years. Some of the requirements apply only to arrangements used to comply with auto enrolment requirements. This Guide draws together the key DC
Governance requirements for occupational arrangements that are currently in force (or will be inforce shortly).
From 6 April 2015, all occupational pension schemes providing money purchase benefits must prepare an annual Chair's Statement, unless the only money purchase
benefits are additional voluntary contributions ('AVCs'). Certain small schemes and certain public service schemes are exempt from this requirement. The Chair's
Statement must be signed within 7 months of the scheme's year ending and must be provided to members alongside the trustees' Annual Report. Failure to meet
the deadline means a mandatory fine from the Pensions Regulator '(tPR') of at least £500 and up to £2,000, depending on the number of members affected, any
previous breaches and whether there is a professional trustee.
The Chair's Statement must include prescribed information about the default arrangement, including its latest statement of investment principles, details of any
review of the default arrangement during the previous year and any changes made as a result of the review (or if no review, the date of the last review); a statement
about how the requirement to secure that core financial transactions are processed promptly and accurately has been met during the year (core financial
transactions include the investment of contributions, transfers and payments to members); details of the level of charges and transaction costs for the default
arrangement and any other fund in which assets relating to members are invested and the trustees' assessment of the extent to which the charges and transaction
costs represent good value for members; a statement about how the trustee knowledge and understanding requirements have been met during the scheme year
and how the combined knowledge and understanding of the trustees together with the advice available to them enables them properly to exercise their functions.
Master trust arrangements must also include a statement that the majority of the trustees are non affiliated and details of the arrangements in place to encourage
the members to let the trustees know their views on matters relating to the scheme.
Identifying the default arrangement can be complicated and there may be more than one default arrangement, A default arrangement must be used to meet the
employer's auto enrolment duties in relation to at least one employee and member contributions are directed to the fund without the member having to make a
choice; or at least 80% of the employer's workers who are active members are contributing to the fund either on 6 April 2015 (or the employer's staging date if
later); or where the fund first receives contributions after 6 April 2015 (or the employer's staging date if later), at least 80% of the employer's workers who are
active members are contributing to that fund.