The Government has issued a consultation: “Better workplace pensions: further measures for savers” regarding its proposals for the further regulation of defined contribution (DC) occupational pension schemes.
The most-widely reported proposal is a cap on the annual charge paid by members, of 0.75% of funds with effect from April 2015. This cap will apply to the default funds of all qualifying schemes, although schemes will be able to offer other funds with higher charges. Initially, transaction charges (the cost of buying and selling securities within a fund) will be excluded from the cap; however, in 2017, the Government will review whether some or all transaction costs should be included in the default fund charge cap and whether the level of the cap should be lowered.
Further measures proposed include:
- the introduction of Independent Governance Committees (IGCs) to protect members’ interests in contract-based schemes,
- a requirement for trustees to consider and report against quality standards in trust-based schemes,
- a ban on consultancy charges (fees paid to third parties and funded by member charges) in qualifying schemes from April 2015,
- a ban on adviser commissions and Active Member Discounts in qualifying schemes from April 2016,
- from April 2015, new duties for trustees and IGCs to consider and report on costs and charges, as well as mandatory standardised disclosure of all pension costs and charges.
Quality standards
The quality standards referred to in the second bullet above are set out below.
- All schemes must be governed by a body with a duty to act in members’ interests (trustees or an IGC).
- The governing body must be able to freely exercise its duty to act in members’ interests and to explain how any conflicts of interest are handled.
- The majority of individuals, including the chair, of the governing body must be independent of the pension provider.
- The governing body must consider:
- the design and net performance of default investment strategies,
- standards of administration,
- charges borne by scheme members and
- costs incurred through investment of pension assets.
- The governing body must have access to all of the resources, knowledge and competencies necessary to run the scheme properly.
- The chair of the governing body must produce an annual report explaining how the scheme has performed against the quality requirements.
The Pensions Regulator’s DC code and guidance will be updated to reflect these new governance standards.
Charges
Some funds currently have higher charges than 0.75% per annum because they offer additional services, such as annuity-broking at retirement. However, the Government contends that members should not be defaulted into paying for such services, which they may never use. Instead, they should make an active choice to use, and pay separately for, “add-on” services.
The current Pensions Bill contains proposals for full transparency of all costs and charges in workplace pensions, including both the administration charges that come under the default fund charge cap and transaction costs. From 2015, trustee boards and Independent Governance Committees will have new duties to consider and report on costs and charges. The Government will then build on this to introduce fully standardised, line by line disclosure of costs and charges. It is seeking views also on whether the transparency requirements for DC schemes should, in the future, be extended to defined benefit (DB) schemes to enable employers to further scrutinise the costs they are paying.
Timetable for implementing the reforms
The Pensions Bill contains primary legislation that will deliver most of this package of measures. Assuming that the Bill receives Royal Assent, the Government aims to lay regulations, containing the detail of the legislation, towards the end of 2014.