The DWP has recently issued guidance to help trustees of occupational pension schemes and their advisers comply with the implementation of the Occupational Pension Schemes (Charges and Governance) Regulations 2015 (the ‘Regulations’) set to take effect on 6 April 2015. Below is a summary setting out the main points for consideration.
From 6 April 2015, the charges that scheme members can be required to bear for the default arrangement within affected schemes used by employers to meet their auto-enrolment obligations will be capped at 0.75% of the value of the funds under management. Other charging practices, including active member discounts for those still paying into their pension pot, will be banned.
The charge cap will apply to all costs and charges associated with scheme and investment administration. Some examples of charges that fall outside the cap are: winding up costs, costs associated with pension sharing on divorce and costs which are solely associated with providing death benefits.
What schemes are affected?
Occupational pension schemes used by employers as qualifying schemes for automatic enrolment and which provide money purchase benefits, subject to certain exclusions.
Which scheme members are covered by the cap?
Members who contribute to a ‘default arrangement’ (explained below) of an affected scheme, on or after 6 April 2015, will be covered by the cap. Trustees, therefore, need to ensure that the default arrangement is compliant with the Regulations from the time that they receive the member’s first contribution from this date onwards. The charge cap will remain for as long as the member is invested in the default arrangement.
What is a ‘default arrangement’?
For an arrangement to be a ‘default arrangement’, the Regulations state that it must provide money purchase benefits which are used to meet auto enrolment duties in relation to at least one jobholder; and meet one or more of the following tests:
- An arrangement under which the contributions of one or more workers are allocated to a fund or funds where those workers have not expressed a choice as to where those contributions are allocated (Reg 3(2)(a))
- Subject to paragraph (3), an arrangement which, on the relevant date, was an arrangement under which the contributions of 80% or more of the workers who were contributing members of the scheme on that date were allocated where those workers were required to make a choice as to where their contributions were allocated (Reg 3(2)(b))
- An arrangement which first received contributions from workers after the relevant date, and under which, at any point after the relevant date, the contributions of 80% or more of workers who are contributing members of the scheme are allocated where those workers were required to make a choice as to where their contributions are allocated. (Reg 3(2)(c)).
Paragraph (3) states that Reg 3(2)(b) should only apply to members who were required to make an active choice as to where their funds were directed, and who are accruing some money purchase benefits which are not through AVCs.
Being compliant with a charge cap
There are two methods which can be used to confirm whether a trustee is being compliant with a charge cap: the prospective method of assessment and the retrospective method of assessment.
The prospective method is less onerous and therefore preferred by most trustees. With this method the trustees effectively certify at the beginning of the charges year that the scheme’s charges regime complies with the charge cap. However this can only be used if the scheme has a predictable charges regime.
With the retrospective method, the trustees must calculate the value of the member’s rights under the default arrangement at reference points set at equal intervals during the charges year of no more than 3 months.
Trustees and advisers of DC schemes should now be taking any necessary steps to ensure their schemes will comply with the changes on and from 6 April 2015.