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Better workplace pensions consultation on charging ABI summary

Steve Webb Pensions MinisterPensions Minister Steve Webb made a statement in the House of Commons on Thursday March 27, 2014 on quality workplace pensions.

The highlights include:

From April 2015:

  • A cap of 0.75% on funds under management for the default fund in qualifying schemes.
  • Consultancy charging will be banned in all qualifying schemes.
  • Active Member Discounts (AMDs) and member-borne commission have to fit within the charge cap.
  • Contract-based scheme providers to operate Independent Governance Committee (IGCs) to assess value for money and report on quality standards. Similarly, there will be new requirements for trustees.
  • Trustees and IGCs will have new duties to consider and report on costs and charges. This will then be built on through requirements (via regulations and FCA rules) for full disclosure of all administration charges and transaction costs. Disclosure will be standardised and comparable.

From April 2016: AMDs and member-borne commission will then be banned altogether.

In 2017: they will examine transaction costs and generally re-examine the cap.

The Command Paper and impact assessments accompanying the statement can found on the Government website.

Minimum quality standards in workplace pension schemes (Chapter 1)

  • New quality standards will apply across all DC workplace pension schemes, and will cover default investment strategies, performance, charges and costs, and governance. 
  • From April 2015, there will be requirements for providers of contract-based schemes to operate IGCs to assess value for money and how they meet quality standards. They will have the powers to escalate concerns to members, employers and the FCA. The paper sets out guidance on how IGCs should operate, including their duties and membership.
  • From April 2015, there will be requirements for trustees to consider and report against the quality standards, and new measures to strengthen the independence of governance in mastertrust arrangements.
  • Consultation: the FCA will consult later in the year on changes to its rules for contract-based schemes, however views are welcomed on the proposed terms of reference for IGCs. DWP are also seeking views now until 15 May 2014 on the proposals for trust-based schemes.

Scale in workplace pension schemes (Chapter 2)

The conclusion is there is no case for further intervention to accelerate the trend towards consolidation. Noting that the risks presented by small workplace schemes are diminishing and the introduction of broader measures relating to quality for workplace schemes, along with specific non-legislative initiatives such as TPR’s DC code and the legacy audit.

Tackling unfair charges – a cap on charges (Chapter 3)

  • From April 2015: a 0.75% default fund charge cap on funds under management, excluding transaction costs, for all qualifying schemes. Any commission or AMD structures must not take member-borne charges above this level. Consultancy charging will be banned in all qualifying schemes. The paper sets out a non-exhaustive list of examples of costs and charges included and excluded from the charge cap.
  • From April 2016: AMD structures and member-borne commission banned in all qualifying schemes. 
  • These measures will be accompanied by the introduction of requirements for schemes to report on costs and charges, in line with the new quality standards, from April 2014. Thereafter to disclose all costs and charges (both administration and transaction costs) in a standardised, line item format to trustee boards and IGCs.
  • Government expects pension schemes and providers to make progress immediately to tackle complex and opaque transaction costs, ahead of new reporting requirements coming into force from April 2014. This activity will inform consideration in 2017 of whether some or all transaction costs should be capped in workplace pension default funds.
  • Individuals should only be defaulted into paying for those essential services without which the pension scheme cannot function (e.g. keeping records). All other services should be marketed as ‘add-on features’ and therefore should not be passed on to members by default and cannot be included within the default fund charge cap. Examples of what might be considered add-on features include rider benefits, annuity broking, and embedded protection benefits (like life cover).
  • The Government is considering the case for taking further action on excessive or unfair entry and exit fees, particularly in light of proposals for automatic transfers.
  • There are ‘equivalence tables’ setting benchmarks for how providers should assess their multi-charge arrangements against the charge cap.

The latter chapters of the Command Paper set out the changes for specific areas in more detail:

Active Member Discounts (Chapter 4)

  • From April 2015, the default fund charges for both active and deferred members of qualifying schemes should fit under the default fund charge cap of .75%.
  • From April 2016, no qualifying schemes should contain an active member discount or similar mechanism that results in higher charges for deferred members.

Commission and consultancy charges (Chapter 5)

  • The Government proposes that commission be banned in all qualifying schemes. In future, employers or providers should cover the costs of setting up a scheme, not members. Any bespoke advice services for members, such as one-to-one sessions or educational seminars, should be offered on a purely opt-in basis and should not be included in default funds. If an employee wishes to pay for advice, they can choose to do so.
  • Between April 2015 and April 2016, any commission payments will be subject to the overall default fund charge cap, set at 0.75 per cent of funds under management, on member-borne deductions in the default funds of qualifying schemes.
  • From April 2016, no qualifying scheme can contain member-borne commission payments to an adviser.
  • The proposal is to make the regulations to extend the existing ban on consultancy charges to include all qualifying schemes from April 2015, including those where a legally enforceable agreement was in place before 10 May 2013.
  • The Government proposes that the ban on member-borne commissions be introduced after the proposed default fund charge gap.

Transparency in workplace schemes (Chapter 6)

  • The proposals on transparency will cover both the administration charges that come under the default fund charge cap and transaction costs.
  • From April 2015, trustee boards and Independent Governance Committees will have new duties to consider and report on costs and charges. Pension schemes and providers should immediately start making progress in these areas.
  • Thereafter, the Government will introduce new requirements - via regulations and FCA rules - to standardise the disclosure of administration charges and transaction costs, making this the first international example of full transparency in pension schemes.
  • Government will also use transparency information on transaction costs to consider, in 2017, whether to include some or all of these costs within a reviewed default fund charge cap.
  • The Government will start work immediately with regulators, providers, trustees and asset managers on the design and implementation of the relevant standards and products to ensure maximum effectiveness of these transparency measures.
  • The Government is also seeking views on whether the transparency requirements they are introducing for DC schemes should, in the future, be extended to DB schemes to enable employers to further scrutinise the costs they are paying.
  • Schemes and providers – including mastertrusts – must make available consistent and comparable information in a standardised format to employers on charges and costs. Government will set out the detail of what will be required of providers in regulations and work with the FCA on the development of rules after engaging with both regulators and the industry.
  • The Government proposes to require trustees and providers to provide headline information about management charges in the basic scheme information to new and prospective members and to require the disclosure of headline charges and costs to members as part of the annual benefit statement.

Last updated 01/07/2016