Scheme governance standards: new requirements for money purchase schemes

United Kingdom

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

New governance standards for money purchase schemes are to be introduced in April 2015. They focus on the design and monitoring of default investment arrangements. At the same time an annual charge cap of 0.75 per cent is to be applied to default funds used by schemes for automatic enrolment purposes. The details of the proposals are set out in a consultation document and draft regulations published earlier this month. Final regulations setting out the detail of these proposals are expected in early 2015.

The key governance requirements for trustees will be that:

  • default arrangements must be designed in the members' interests and kept under regular review;
  • core financial transactions must be processed promptly and accurately;
  • the value of costs and charges borne by members must be assessed;
  • scheme documentation must not restrict the choice of administrator, fund managers or advisers to the scheme; and
  • a chair of trustees (the Chair) must be appointed with responsibility for signing off an annual statement describing how the governance requirements have been met.

Similar requirements are likely to apply to workplace personal pension schemes, to be overseen by new Independent Governance Committees. These will be subject to regulation by the Financial Conduct Authority (FCA).

The governance standards for occupational schemes will be overseen by the Pensions Regulator, with each scheme having to produce an annual statement signed by the Chair. This will be available to members in the same way as the annual report.

Contents of the Chair's statement
  • Description of default arrangement, aims and policies in relation to investments and an explanation of how these are in the best interests of the scheme’s membership.
  • Review of default strategy and net performance of underlying investment funds (or if no review, date the last review took place).
  • Explanation of how trustees have assured themselves that core scheme financial transactions are processed promptly and accurately.
  • Report on charge levels in default funds and the range of charges in other funds and whether they deliver value to members.
  • Report on transaction costs, or an explanation of why they have not been able to obtain them and an assessment of the value they represent.
  • Assessment of how the combined knowledge and understanding of the trustees, together with advice available, enables them properly to exercise their functions.
  • Details of the recruitment process for trustees (master trust only) and how the requirement for a majority of trustees to be independent has been met.
  • Description of how members have been encouraged to make their views known (master trust only).

The charge cap of 0.75 per cent of funds under management will apply to default arrangements used by qualifying schemes for the purposes of automatic enrolment. Default arrangements will include arrangements into which member contributions are directed without them having made an active choice and arrangements where at least 80 per cent of active members employed by the same employer are contributing. The 0.75 per cent will include all member-borne deductions paid to the provider or third party excluding transaction costs. Schemes will be allowed to levy higher charges with the written consent of the member (these are referred to as opt-in charges). The cap will apply to the entire default funds of members who actively contribute to a relevant scheme after 5 April 2015 (not just to the contributions made after that date).

The impact of the new provisions on different types of scheme and arrangement is summarised below. Qualifying schemes are those used by the employer to satisfy its automatic enrolment obligations.

Scheme or section Governance standards Chair's statement Charge cap
Occupational money purchase qualifying scheme
Occupational money purchase scheme/section (not qualifying) χ
Workplace personal pension scheme FCA FCA
Money purchase AVC section χ χ
Trust based stakeholder scheme
Master trust
SSAS and executive schemes χ χ χ