We look at the new measures to control the level and nature of charges of default arrangements of defined contribution (DC) pension schemes.
Legislation brought into force in April 2015 imposes new measures to control the level and nature of charges of default arrangements of defined contribution (DC) pension schemes. Trustees to whom this applies must ensure that their scheme complies with these legal requirements.
Scope of Cap
In general, a 0.75% charge cap will apply to all costs and charges pertaining to scheme and investment administration. The only exceptions broadly fall in to the following categories:
- Transaction costs
- Winding up costs
- Costs of complying with a court order
- Costs of administrating death benefits only
If trustees have identified default arrangements in their scheme(s) that are likely to be subject to the charge cap, they should consider the level of charges and ensure compliance with the 0.75% cap. Being a default “arrangement”, contributions may be allocated to more than one investment or fund. If multiple investments are included in a scheme’s default arrangement, the overall aggregate charge must comply with the cap, in respect of each individual.
If trustees determine that compliance with the cap cannot be achieved, they should act promptly to:
- a) Close the default arrangement to future contributions by members; and/or
- b) Re-direct future contributions to a new (charge cap compliant) default arrangement, along with accrued funds if appropriate. The charge cap will continue to apply to members’ funds which remain invested in the default arrangement, including the funds of deferred members.
If the aggregate charge to which an individual’s assets are subject in a default arrangement does comply with the cap, no transfer is required.
Disinvestment from funds can result in significant costs. However, in a default arrangement, compliance with the cap is mandatory.
In these circumstances, Trustees should inform members of the three options available to them:
- Consent to remain in the existing, un-capped arrangement
- Request to be transferred to a capped arrangement of their choice
- In the event that they fail to respond, have their accrued benefits transferred to a capped arrangement by default
The law requires a trustee board to appoint a Chairperson, who should have been appointed by 5 July, 2015. The chair must be identified in the scheme return. The Chairperson is responsible for signing an annual statement, to be provided to The Pensions Regulator, which details how the trustees have met the new governance standards.
The Pensions Regulator is not in a position to confirm that a scheme’s charges comply with the cap. Therefore, trustees may wish to seek advice on how their particular scheme may be affected, so that compliance may be positively affirmed by the Chair.
For more information or if you have any questions, please contact one of our pension specialists below.
Author: Alan CadmanThis information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.