Out-Law News 2 min. read

UK Pensions Regulator to require confirmation of charge cap compliance from DC scheme trustees and managers


Trustees of occupational defined contribution (DC) pension schemes will be required to confirm their compliance with the 0.75% scheme charge cap when they next complete a regulatory return, the Pensions Regulator has said.

They will also be asked to confirm the name of the scheme's chair , reflecting new scheme governance requirements which came into force along with the charge cap on 6 April. DC schemes must complete a scheme return once every one to three years, depending on the size of the scheme.

Pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, said trustees would be able to refer to guidance issued by the Department for Work and Pensions (DWP) (31-page / 531KB PDF) when working out how to apply the charge cap. However, some of the rules remained very complicated even with this guidance and there were "pitfalls" that trustees would have to be aware of, he said.

"The duty to make sure the charge cap is not exceeded and other charge-related constraints are complied with falls on trustees," he said.

"The method of calculating the level of the cap is complex, as is working out what funds and investments the cap applies to. It generally applies to default funds and strategies but the devil is in the detail. Trustees need to be very careful and conduct analysis of whether they have identified all their default arrangements. This will mean re-visiting any historical mapping exercises. It will not always be the case that such exercises result in a self-select arrangement becoming a default, but trustees need to form a view on this," he said.

As of 6 April, management fees on default funds in DC schemes used for automatic enrolment have been capped at 0.75% of funds under management. The cap covers all member-borne charges and deductions on these schemes, but excludes transaction costs. However, trustees will be required to publish annual reports on transaction costs, and these may ultimately be included in a further cap when it is reviewed in 2017. Some charging practices, including consultancy charges and commission, will be banned from next year under the new rules.

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

The Pensions Regulator regularly issues returns requesting information about pension schemes, which must be completed and returned to the regulator within six weeks. Non-compliance or non-completion is a breach of the 2004 Pensions Act, and may result in further investigation or a fine. Defined benefit (DB) and hybrid schemes, and DC schemes with 12 or more members, are issued with returns annually while DC schemes with fewer than 12 members are issued with a return once every three years.

Pensions expert Tom Barton said that some of the issues trustees would have to grapple with as part of the new requirements included making sure that the cap was being applied across the right period, and making sure that the cap was not exceeded in relation to those who joined or left within that period. They would also have to establish what was the scheme's 'default' arrangement for the purposes of the new rules, bearing in mind that even schemes that did not consider themselves as offering a default could still be covered.

"We have also seen some commentators suggest that any costs incurred in relation to a member must be either administration costs caught by the cap; or transaction costs excluded from the cap which may become subject to constraints in due course," he said. "This is not actually how the legislation is written and so there may be some costs which fall under neither category."

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