The Government has consulted on draft regulations that introduce the charge cap and other governance measures for money purchase arrangements with effect from April 2015.
Governance
The governance arrangements will not apply to:
- Small Self-administered Schemes,
- executive pension schemes,
- public service pension schemes,
- NEST and
- schemes where the only money purchase benefits relate to AVCs.
The first two of these will be exempt from the charge cap as well but all other schemes that are qualifying schemes for auto-enrolment and provide money purchase benefits will be subject to the charge cap.
Every scheme will be required to have a Chair of trustees. The Chair’s only additional responsibility will be to sign off an annual chairman’s statement.
The Regulations will require trustees to ensure that default arrangements are designed in members’ interests and reviewed at least every three years. The Chair’s statement will have to include a description of the default arrangement offered by the scheme, with a clear statement of aims, objectives and policies in relation to investments and an explanation of how these are in the best interests of the scheme’s membership.
Regulations will require also that trustees ensure that core scheme financial transactions be processed promptly and accurately, although they will not specify an exhaustive list of such transactions, nor dictate a timescale that constitutes “promptly”.
Trustees will be required to calculate the charges and transaction costs borne by members and assess the extent to which they provide good value for members. The annual Statement by the Chair of trustees should contain:
- annual charges in the default arrangement, and the range of charges in other funds, and the trustees’ assessment of the value delivered by these,
- the levels of transaction costs – where trustees have been able to access this information – and their assessment of the value delivered by these and
- details of any information about transaction costs which trustees have been unable to obtain and an explanation of the steps being taken to obtain that information in future.
The charges assessed should include fund AMCs, contribution charges and flat policy fees.
The Chair’s Statement will be included in the trustees’ annual report and & accounts and will have to include also an assessment of how the trustees’ aggregate knowledge and understanding, together with the advice available to them, enables them to exercise their trustee functions effectively.
From April 2015 there will also be new independence requirements for master trusts, who must have a minimum of three trustees, the majority of whom must be independent, and these independent trustees will be subject to limited terms of office.
Caps on charges
From April 2015:
- member-borne charges (excluding transaction costs) on the default arrangements in qualifying schemes will be limited to 0.75% of the fund each year and
- the ban on consultancy charges will be extended to all qualifying schemes.
From April 2016:
- member-borne commission will be banned in all qualifying schemes, as will Active Member Discounts (AMDs), although employers will be allowed to subsidise charges for active members if they wish.
In 2017:
- the level of the charge cap will be reviewed.
The charge cap will not apply to risk-sharing (defined ambition) schemes, although the bans on active-member discounts, commission and consultancy charges will still apply to such schemes.
In trust-based schemes it will be the trustees’ responsibility to ensure that their schemes comply with these measures. When assessing whether charges are within the cap, charges for activities such as pension sharing on divorce should be excluded, as should costs of winding up the scheme. Furthermore, schemes will be able to levy additional charges for services which members agree to in writing.
“Default arrangement” will be deemed to include any arrangement into which 80% of active members are contributing in April 2015 (or the employer’s staging date if later) and any arrangement into which 80% of active members who first make contributions after April 2015 (or the employer’s staging date if later) are contributing. (Note that this may result in existing qualifying schemes that are not being used to auto-enrol new members not having any arrangement that is deemed to be a default arrangement.) The cap will not apply to those members who have already ceased contributing when the charge cap is first applied to their scheme. However, trustees will be expected to offer such members the opportunity to switch into a fund that complies with the cap.
Capped charges will have to be either:
- a single charge that is within the 0.75% cap or
- a dual charge that satisfies the cap shown in the table below.
The dual charge must comprise a percentage of funds under management plus either a percentage (not exceeding 2.5%) of each contribution or a flat annual fee (not exceeding £25). Depending on the level of the contribution or flat fee the fund-related fee will be limited as follows:
| Contribution percentage (%) or
flat fee (£ pa) charge |
Existing funds charge rate
(% pa of funds) |
| Up to 1% or up to £10 | 0.6 |
| 1% to 2% or £10 to £20 | 0.5 |
| 2% to 2.5% or £20 to £25 | 0.4 |
Any fund with a more complex charging structure will be deemed not to meet the cap.
Enforcement
Three new questions will be added to the Pensions Regulator’s scheme return for money purchase schemes:
- the name of the Chair of trustees,
- whether the Chair’s annual statement has been produced and
- whether the scheme has complied with the charges cap and the other charging measures.
In schemes which fail to comply with the Chair’s Statement requirement a fine of between £500 and £2,000 will be levied against the board of trustees.
The regulations require TPR to investigate breaches of legislation and to issue compliance notices to the board of trustees or, where appropriate, a third party (such as a fund manager or provider). If TPR is of the opinion that steps in the compliance notice are not being followed, it must issue a penalty notice to either the board of the trustees or the third party. The amount of the fine for a breach of the charges or governance provisions of the regulations, or for failure to comply with a compliance notice, will be higher than that for failing to produce the Chair’s annual statement.
The consultation on the draft Regulations closed on 14 November and the final Regulations are expected to be laid before Parliament early in 2015.