Out-Law News 3 min. read
28 Mar 2014, 10:04 am
According to figures from the Department of Work and Pensions (DWP), the cap will be worth an extra £200 million to savers over the next 10 years. It will not immediately include transaction costs, but new rules will be introduced to ensure that all such charges are published and they may be included within the cap at a later date.
Pensions law expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that pension savers would welcome the imposition of the low charge cap, which was the toughest of the three possibilities consulted on by the DWP last year. However, he said that opting for a low flat-rate cap left "little wiggle room" for more innovative schemes that may have ultimately provided better value for money.
"Savers will welcome the imposition of a low charges cap, with the prospect that it may be lowered further in the future," he said. "Some in the pensions industry will be concerned that a low cap could stifle innovation. The low charges cap leaves little wiggle room for innovative investment with the potential for higher performance. Low charges do not always translate into a larger pot overall."
"The exclusion of transaction costs from the charges cap is sensible. Transaction costs can fluctuate dramatically as managers react to changing markets. Transparency over transaction costs is to be welcomed, provided the costs can be readily understood by the target audience – if presented in the right way, cost figures can help trustees and independent governance committees reach the right decisions for their schemes," he said.
The cap will initially cover all member-borne charges and deductions, excluding transaction costs, on DC schemes used for automatic enrolment. Equivalent caps will apply to schemes, such as the National Employment Savings Trust (NEST), which use a combination charging structure featuring flat fees or contribution charges along with charges based on a percentage of funds under management. The cap will be reviewed in 2017, when the government will consider whether it should be lowered and whether transaction costs should be included.
In addition, three different categories of pension charge are to be banned altogether: commission payments which are deducted from members' pensions; active member discounts (AMCs), which result in higher charges for people who are no longer employed by a company but who have left money in that company's scheme; and consultancy charges, where charges for financial advice given to the employer are deducted from scheme members' pension pots. These can be included in the cap from 2015, but will be abolished from 2016.
New quality standards set by the government will also apply across all DC workplace pension schemes. These will be designed to ensure that people running schemes understand what is needed for a 'quality' scheme and have members' interests as their priority. The implementation of these standards will also take into account the different strengths and weaknesses of trust- and contract-based schemes.
From April 2015, providers of contract-based schemes will be required to operate Independent Governance Committees (IGCs) to assess the value for money delivered by these schemes and report on how they meet the quality standards. They will have the power to escalate concerns to members, employers and the regulator. Trustees of trust-based schemes will also be required to consider and report against the quality standards.
New measures will also be 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. The DWP has proposed that master trusts have at least seven trustees, the majority of whom should be independent from the pension provider; and that arrangements be put in place for the trustees to hear directly from the scheme members.
"The DWP has borrowed heavily from the regulatory experience of with-profits arrangements when structuring the IGC arrangements," said pensions expert Tom Barton of Pinsent Masons. "There is also a nod in the direction of the MNT arrangements used in trust-based schemes. But perhaps it is more likely that we'll see more innovative ways of satisfying member representation requirements than this."
"The well-run master trusts seem to be suffering because of the perceived existence of bad ones. Existing quality governance structures will need to be re-jigged simply to tick the right boxes, putting a further strain on providers," he said.
Simon Tyler added that pension savers should end up in better run schemes, with more carefully selected default funds, as a result of the measures set out in the paper.
"If auto-enrolment is to succeed, pension scheme members need to be confident that the schemes they are joining are worth staying in," he said. "The proposed measures are a move in the right direction. We should see a rise in pension savings as a result."
"Trustees and IGCs will have lots to do to bring schemes up to scratch. Real improvements will require the investment of time and effort. Providers are being asked to do more at a time when caps on charges are being imposed," he said.