Post-2015 UK pensions landscape taking shape, says expert, as government publishes draft charges and governance regulations

The draft Occupational Pension Schemes (Charges and Governance) Regulations, published in response to a recent consultation, will cap charges at 0.75% of the value of the funds under management and ban other charging practices, including active member discounts for those still paying into their pension pot.

Pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, said that the draft regulations contain "much of the detail we need to establish more precisely what the future DC [defined contribution] pensions landscape will look like". 

"It's not just the content of the DWP [Department for Work and Pensions]'s consultation response which is interesting. The title is too.  Along with the 'freedom and choice' tax changes due to come into force next April, it emphasises that those in workplace pension schemes are very much 'savers' these days, rather than members," he said.

"On the issue of scheme charges, plenty of imponderables remain - but anything which is not strictly covered by the constraints on member-borne charges will be covered by the value for money assessment which trustees or IGCs will have to undertake. Interestingly, the DWP has agreed to allow employers to subsidise active member charges, notwithstanding the prohibition on active member discount.  The challenge for employers and providers will be to document this correctly," said Tom Barton.

The 0.75% charge cap will initially apply to DC schemes used for automatic enrolment and cover all charges excluding transaction costs. Equivalent caps will apply to the National Employment Savings Trust (NEST) and other schemes that use combination charging structures. The FCA will shortly publish further rules regarding consultancy charges and commission.  The DWP intends to consult in 2015 on regulations to ban commission charges in occupational schemes used as qualifying schemes from April 2016.

The government intends to review the cap in 2017 to see whether it is working for the benefit of consumers, and whether it should be extended to include transaction costs.

New governance standards will also apply from April 2015 and require trustees to design the scheme's default fund investment arrangements in members' interests, keep these arrangements under regular review and ensure that core transactions are processed promptly and accurately. Trustees would also be required to regularly assess the value of transaction costs and charges borne by scheme members, and to appoint a 'chair' who would be responsible for signing off an annual statement on how the quality standards had been met.

"Much of the focus here is on default investment strategies - but trustees should be reminded that they have fiduciary duties to all scheme members, and not just those invested in the default strategy or fund," said Tom Barton. "The introduction of the anticipated 'annual statement of the chair of trustees' had been anticipated, and is a significant development which will focus the minds of all trustee boards with a DC element."

"Arguably many of the new standards in trustee governance proposed in these draft regulations already exist in the form of trust law duties - however, the DWP standards provide helpful clarity of what is required," he said.

The DWP is now consulting on the draft regulations until 14 November.

New measures are also being introduced to strengthen the independence of the governance of 'master trust' arrangements, which enable pension scheme providers to manage a DC scheme for several employers under a single trust arrangement. These schemes will be required to have at least three trustees, the majority of which should be independent from the pension provider. Trustees must be appointed using an "open and transparent" process, and independent trustees will be subject to limited terms.

"The size of master trust boards is a difficult problem," said pensions expert Mark Baker of Pinsent Masons. "We've now seen the DWP set a legal minimum requirement of three trustees but suggest that a minimum of five trustees will be best practice.  Some providers will adjust easily, but others will find the changes frustrating.  Existing master trust boards will question the value of adding extra independents to an arrangement that works well. The DWP's answer is breadth of views and experience. So trustees and providers will need to work hard to make sure that this translates into practice," he said.

Contract-based schemes will be required to set up independent governance committees (IGCs) to provide the same oversight on behalf of scheme members as provided by trustees of trust-based schemes. The Financial Conduct Authority (FCA), which regulates contract-based schemes, has already consulted on draft rules to introduce these IGCs.