Pension schemes providing defined contribution (DC) benefits have been subject to a slew of regulation and continue to come under close scrutiny. April 2015 saw the introduction of various measures, including the new pension flexibilities. From 1 October 2015, short service refunds for money purchase benefits will be abolished for members who have at least 30 days pensionable service. In this article we will be looking at changes affecting DC benefits proposed for the medium term.
As a consequence of automatic enrolment, many workers are now enrolled in DC pension schemes. In order to safeguard these workers against excessive charges and to promote value for money, the Government introduced a charge cap of 0.75% applicable to members’ funds invested in a default arrangement under a DC occupational pension scheme. From 6 April 2015, trustees of occupational pension schemes have been under a legal duty to ensure that no members’ funds in a default arrangement are subject to charges in excess of the cap. Further, the chair of the trustees is required to state the level of charges applicable to the default arrangement in his annual statement.
Similar charge-capping measures apply to personal pension schemes.
Later this year, the DWP and the Financial Conduct Authority will consult on rules for improving the reporting and disclosure of information about transaction costs in occupational and personal pension schemes. Currently transaction costs are excluded from the charge cap, although a decision will be made in 2017 on whether to include some, or all, transaction costs within the cap.
The DWP will also be consulting this year on regulations to ban consultancy charges and member-borne adviser commissions in qualifying schemes used for automatic enrolment.
Finally, from April 2016 it will be unlawful to impose higher charges on deferred members of occupational pension schemes (so-called “active member discounts”).
It is anticipated that automatic enrolment will lead to an increase in the number of small DC pots and, therefore, the Government will introduce an automatic transfer mechanism which will facilitate the transfer of small DC pots to the pension arrangement of the member’s new employer.
The automatic transfer mechanism will be introduced in two phases: phase one will start in October 2016, and will require members to opt into the transfer mechanism; whereas phase two will occur at some later date (as yet unknown) and will require the automatic transfer of a member’s eligible DC pot unless the member opts out.
Initially the transfer mechanism will be limited to a handful of market participants, although those participants are intended to cover a large segment of the automatic enrolment market.
The automatic transfer mechanism applies to eligible DC pots, meaning the pot must meet certain statutory criteria including:
- the pot must be worth less than £10,000;
- the pot must be dormant, meaning no contributions have been paid in during the 12 months following the latest annual statement; and
- the member must have been saving into a charge-capped default arrangement under a former employer’s DC workplace pension scheme and, after changing employment, has begun saving into another chargecapped default arrangement under his new employer’s DC workplace scheme.
Market participants will set up their own registers which will record certain key details about members’ eligible DC pots. These registers will be interoperable, meaning they will be required to meet certain standards governing how they hold, send and deal with data. The registers will play a crucial role in the automatic transfer mechanism by allowing a member’s former pension scheme to upload details of his eligible DC pot onto the register, which may then be searched by the member’s new pension scheme. Once an eligible DC pot has been identified, the member will be asked whether, during Phase 1, he wishes to transfer the pot to his new pension scheme, or, during Phase 2, he wishes to cancel the transfer which would otherwise occur automatically.
Early exit charges consultation
The Government has launched a consultation, Pension transfers and early exit charges, to investigate potential barriers to the new pension flexibilities. In April this year the pension rules were changed so that all individuals aged 55 or over with DC pension savings are entitled to access their pensions flexibly, regardless of their total pension savings. Although there is no obligation on providers and employers to allow members of their own schemes to access their benefits flexibly, members’ statutory transfer rights have been strengthened to allow members to transfer their benefits to other DC arrangements which would allow them to do so.
The purpose of the consultation is “to gather more evidence and, where appropriate, explore ways to strengthen people’s rights to access their pension flexibly, and remove any unjustifiable barriers to their doing so”. In particular, the consultation:
- considers the issues around early exit charges;
- seeks views on how the process for transferring pensions from one scheme to another could be made smoother; and
- explores issues and concerns in relation to the provision, and need for, financial advice when making certain transfers.
The consultation closes on 21 October 2015.
From these initiatives, and others being mooted, it can be seen that the focus on the governance of DC schemes and the value for money they offer is, if anything, likely to intensify. Employers and trustees should expect the time and resources they have to spend on the running of their DC schemes to increase accordingly.