This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.
Summary and implications
As I reported last October, new governance standards for schemes providing money purchase benefits are to be introduced by regulations coming into force on 6 April 2015. They focus on the costs and processing of core financial transactions and on the design and monitoring of default investment arrangements. The Government response to consultation has now been published together with draft regulations.
The governance standards for occupational schemes will be overseen by the Pensions Regulator and will apply to occupational pension schemes holding money purchase benefits except:
- executive schemes;
- certain schemes with fewer than 12 members where all members are trustees;
- public sector schemes; and
- schemes where the only money purchase benefits held are AVCs.
Similar requirements are 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).
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 – we will be issuing a separate briefing on this.
New governance requirements
The key governance requirements in the regulations for trustees will be:
- core financial transactions must be processed promptly and accurately;
- the value of costs and charges borne by members must be assessed;
- a statement of investment principles governing decisions about investments for the purposes of the default arrangement must be prepared;
- default arrangements must be designed in the members' interests and kept under regular review;
- the scheme deed and rules must not restrict the choice of administrators, 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.
Core financial transactions
Core financial transactions are defined as including, but not being limited to:
- investment of contributions to the scheme;
- transfers of assets into and out of the scheme;
- transfers between different investments within the scheme; and
- payments from the scheme to or in respect of members.
Some of the new governance requirements apply only to "default arrangements". Broadly these are investment arrangements where the member does not have to express a choice in order for his contributions to be allocated to that fund. In addition, the arrangement must be used by the employer in relation to at least one worker as a qualifying scheme in order to discharge its automatic enrolment obligations. So a fund could be considered a default arrangement even if it is not being used to meet automatic enrolment duties in relation to all members. The new charge cap will only apply to default arrangements.
Chair of trustees
The Chair can be an individual trustee, a director of a corporate trustee or a professional trustee body which is a trustee of the scheme (e.g. a professional independent trustee). The first Chair must be appointed by 5 July 2015. Schemes which already have a Chair in place who satisfies the prescribed requirements will not have to appoint a new one.
Each scheme must produce an annual statement signed by the Chair. This will be available to members in the same way as the annual report. The statement must be published within seven months from the end of the scheme year to which it relates. Where the scheme year ends within three months of 6 April 2015 then the Chair will not have to produce a statement until seven months from the end of the following scheme year, but will need to include relevant information from 6 April 2015. This means that the first statements will need to be produced for scheme years ending on or after 6 July 2015 (but covering only periods from 6 April 2015) with the first statements required in February 2016.
Further guidance is expected from the DWP on the content of the Chair's statement.
|Contents of the Chair's statement |
- Latest statement of default investment strategy.
- Details of any review of the default strategy and resulting changes (or if no review, date the last review took place).
- Description of how the requirements in relation to core scheme financial transactions have been met.
- 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.
Master trusts and other unconnected multi-employer schemes
Additional requirements will apply to master trusts and other occupational schemes with non-associated employers (other than statutory schemes which will not be subject to the new requirements until April 2016). These schemes must have at least three trustees, the majority of whom must be appointed under an open and transparent appointment process for a period of not more than five years and who must not be affiliated with any service provider in relation to the scheme.
The Chair's statement in relation to such schemes must (as well as the information outlined above) include details of the recruitment process for trustees and a description of how members have been encouraged to make their views known.