Summary and implications

The new charge cap applying to money purchase default arrangements held by occupational pension schemes comes into force on 6 April 2015. Trustees of schemes which are subject to the new cap (being schemes holding money purchase benefits which are used for automatic enrolment compliance) should be taking immediate steps to identify which investment options within their schemes are "default arrangements" for the purposes of the cap and ensuring that those arrangements are compliant. If current funds are not compliant then trustees should be agreeing lower charges with the investment manager, or making available new default arrangements.

The charge cap is part of the wider changes to DC governance being introduced from April 2015 which we covered in a recent briefing. 

The DWP has issued guidance for trustees which provides more information on identifying default arrangements and some examples of how the cap is to be applied and assessed. 

Relevant schemes

The cap will apply only to schemes which are used to meet automatic enrolment duties (although not exclusively to automatically enrolled members within those schemes).

It will not apply to:

  • schemes not providing money purchase benefits;
  • schemes where the only money purchase benefits are AVCs;
  • relevant small schemes (broadly schemes with fewer than 12 members where all the members are trustees);
  • executive pension schemes; and
  • schemes with only one member.

Similar provisions apply to workplace personal pension schemes, but the charge cap on these is subject to regulation by the FCA. 

Default arrangements

The charge cap will apply only to the funds of those members who contribute to a default arrangement on or after 6 April 2015 (or their employer's staging date if later). 

Identifying which of a scheme's investment fund options are default arrangements may not always be straightforward. The starting point is that it must be used to meet the employer's automatic enrolment duties in relation to at least one employee and:

  • member contributions are directed to the fund without the member having to make a choice;
  • at least 80 per cent of the employer's workers who are active members are contributing to the fund either on 6 April 2015 or on the employer's staging date (whichever is later); or
  • the fund first receives contributions after 6 April 2015 or the employer's staging date (whichever is later) and at least 80 per cent of the employer's workers who are active members are contributing to that fund.

If using either of the 80 per cent tests, only active members who were required to make a choice as to the arrangement should be counted and any scheme members only accruing non-money purchase benefits (or whose only money purchase contributions are AVCs) should not be counted.

If the cap is triggered in relation to a member's contribution to a default arrangement, then the whole of that member's benefit within the default arrangement will be subject to the cap (not just the benefits relating to contributions made on or after 6 April 2015 or the staging date). 

Where an arrangement is identified as being a default arrangement in relation to an employer, then any worker of that employer who contributes to that arrangement will be protected by the cap, including those who make an active choice to contribute to the arrangement. 

Where trustees have a default arrangement which they are unable to offer within the charge cap then, before 6 April 2015 (or the employer's staging date of later) they will need to put in place a new (compliant) arrangement into which all future contributions should be diverted. Members must be informed of the switch and must allow members to elect to opt out of this (and remain in the old fund).

Details of the charge cap

There are three types of charging structure which can be used in default arrangements (so it is not necessarily just a straightforward percentage cap). The charge limits apply at individual member level and cannot be smoothed across the default arrangement as a whole. The three options are:

  • a single percentage charge capped at 0.75 per cent of funds under management;
  • a combination of a charge on contributions plus a percentage of funds under management; or
  • a combination of a flat annual fee plus a percentage of funds under management.

The detailed percentages are set out in the DWP guidance as are the two methods by which trustees can assess charges to confirm compliance (the prospective method and the retrospective method).

The charge cap applies to costs and charges associated with scheme and investment administration but certain charges are excluded including:

  • transaction costs (variable costs incurred as a result of buying, selling, lending and borrowing of investments);
  • winding-up costs;
  • the costs of complying with court orders;
  • charges associated with pension sharing on divorce; and
  • the costs associated with providing death benefits.

Penalties for non-compliance

Trustees will be required, as part of the scheme return, to confirm that they have complied with the charge cap in relation to all relevant members (and details of charges in default arrangements will be reqired in the new annual chair's statement). If the Regulator is of the opinion that trustees have not complied then it can issue a compliance notice setting out the steps required by the trustees with a view to remedying the non-compliance.

Whether or not a compliance notice has first been issued, the Regulator can impose a penalty of up to £5,000 on an individual trustee (£50,000 for a corporate trustee) where the charge cap requirements have not been complied with.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.