February 2015

You should consider carefully whether the new requirements apply to your scheme, taking advice where necessary.
This guide focuses on the changes that will be introduced by the proposed Occupational Pension Schemes (Charges and
Governance) Regulations 2015. As these regulations have not yet been passed by Parliament, this guide will only apply if these regulations are brought into force in the form laid before
Parliament on 4 February 2015.
The new requirements include ensuring that your scheme:
• meets new governance standards and explains how it has done so in an annual chair’s statement
• has an appointed chair who signs the annual statement and
• is compliant with the new charge controls where it is being used by employers to comply with their duties under automatic enrolment legislation. In this guide we refer to these schemes as ‘qualifying schemes’.
In this guide, the term ‘trustees’ should be taken to also mean
‘managers’ or ‘board of managers’ in the case of schemes with no trustee, and directors of a corporate trustee (unless the context suggests otherwise).
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The new legislation stipulates how trustees can identify a
‘default arrangement’ in their schemes. The definition of default arrangement used for the governance standards is not the same as that used for charge controls. The definition may also differ from what trustees think of as their scheme’s default fund or strategy. Arrangements used to receive additional voluntary contributions may also be affected. You should seek your own advice to understand how your particular scheme will be affected.
The new governance standards apply to occupational pension schemes that provide money purchase benefits, although exceptions apply. You may wish to seek advice to check whether and how these regulations apply to your scheme. The new standards will require you to:
• explain how you meet the requirements for having, or having access to, sufficient knowledge and understanding to effectively run the pension scheme
• assure yourselves that core scheme financial transactions are processed promptly and accurately. You will need to review the information you receive from your scheme administrator and discuss with them whether it is sufficient to enable you to meet this new standard. You should also consider whether the administration processes and controls that are in place minimise the likelihood of errors or delays in processing core scheme financial transactions.
The administration section of our defined contribution (DC) code gives more detail on how you might do this: www.tpr.gov.uk/ codes/code-governance-administration-occupational-dc-trust­ based-schemes.aspx#s10845
• consider whether the costs and charges borne by members represent good value. The value for money section of our DC regulatory guidance gives more details on how you could approach assessing good value for money at www.tpr.gov.uk/guidance/ guidance-dc-schemes.aspx#s11007
• meet the new governance requirements for the scheme’s default arrangement(s), which will include preparing a statement of investment principles for the default arrangement and ensuring that the strategy and performance are reviewed at least every three years.
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The new legislation also contains an override of anything in the scheme rules that restricts your choice of administrative, fund management, advisory or other services. If you are thinking about whether members’ interests are being best served by the advisers that are currently in place, or you are considering changing advisers, you should bear this in mind.
This does not prevent trustees from entering into longer term contractual arrangements with service providers, although if the costs and charges are borne by members, you will need to consider if they represent good value.
If you run a relevant multi-employer scheme (eg a master trust) then there are additional governance standards that apply to your scheme.
See page 8 for more information.
The law will require that your trustee board has an appointed chair. The chair will be responsible for signing the chair’s statement, a document that details how the trustees have met the new governance standards.
There will be some restrictions on who can be the chair which the law will set out.
The reality for many schemes is that the chair will have particular responsibility for the effectiveness of the trustee board, and may have a casting vote. The new legislation does not affect this. The chair’s only additional responsibility under the new legislation will be to formally sign the chair’s statement.
You will need to tell us which of your trustees is the chair, even if you already have a chair in place. You can do this online via our Exchange system at www.tpr.gov.uk/exchange . If you don’t currently have a chair then you will have three months from 6 April 2015 to appoint one and tell us who it is.
Every year the trustees will have to confirm in the chair’s statement how the scheme is meeting the new governance standards. This will need to be published in the scheme’s annual report and accounts. Trustees who do not comply will be fined between £500 and £2,000. You will have to declare that you have produced this as part of your scheme return.
Your trustee board should take steps to ensure you are complying with governance standards well in advance of your annual report and accounts so that you are able to produce the chair’s statement when the time comes.
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If your scheme is already performing well against the quality features set out in our DC code of practice, or where you are taking steps to improve your scheme in light of these features, then this should put you in an excellent position to comply with the new governance standards.
The first chair’s statement must be produced as part of the first annual report and accounts relating to the scheme year ending on or after 6
July 2015. If your scheme year-end date is 1 October 2015, your first statement will cover 6 April 2015 to 1 October 2015.
If your scheme year-end is within the three months following 6 April
2015, you are still obliged to prepare a chair’s statement covering this period. However, as this would result in you writing a statement covering a very short period of time, you are required to include this short period within the statement for the following year.
All subsequent chair’s statements will have to be completed within seven months following the end of your scheme year.
From 6 April 2015 new regulations on charges will come into force.
These ‘charge controls’ apply to the default arrangements of certain occupational pension schemes that provide money purchase benefits and that are being used as qualifying schemes, although exceptions apply. You may wish to seek advice to determine whether or not the regulations on charges apply to arrangements in your scheme.
The new regulations limit charges and how these charges may be structured. Even if your charges are below the limit, you will still be in breach of the law if the charging structure in use is not allowed by the legislation. If your scheme is in breach of the laws on charge controls then you may be subject to enforcement action.
For the schemes that are affected, an important change the regulations introduce is that trustees must ensure no member’s funds in a default arrangement are subject to charges in excess of a cap. If charges are calculated solely as a simple percentage of members’ funds, 0.75% is the limit per annum. This is measured over a period called a ‘charges year’, which may be different from the year-ends that schemes use for other purposes. If scheme charges are not calculated in this way, but are made up of a charge on members’ funds plus a charge on contributions or a flat fee, the regulations specify how the cap applies to each element.
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The cap on charges applies to deductions from member funds. These may include, for example, deductions relating to:
• payments to providers of professional services like administrators, advisers, actuaries and lawyers
• costs of member communication services like producing statements, website development and printing/posting scheme documentation
• investment management fees, and
• ongoing costs for things like IT, office, staff and record-keeping.
Some types of charge or cost are excluded and do not count against the cap – for example, transaction costs, which are incurred as a result of buying, selling, lending or borrowing investments. Additionally, the new regulations ban the practice of charging more to deferred members than active members. Known as ‘active member discounts’, these will be banned in qualifying schemes (ie not only in their default arrangements) from 6 April 2016.
Default arrangements in schemes that are subject to the new regulations will need to be compliant from 6 April 2015 or the automatic enrolment staging date of the employer to which the default arrangement relates (if that date is later). You will be required to confirm your compliance with the charge controls to us via the scheme return. If your scheme is not compliant you may be subject to enforcement action, including fines.
You should note that if the scheme is also subject to the new governance standards, the trustees will also be required to confirm in the chair’s statement the level or range of charges and (so far as possible) transaction costs applied during the scheme year across all money purchase benefits. You will also need to explain the extent to which these represent good value for members.
If, despite your best efforts, you are unlikely to be able to comply with the charge cap for a particular default arrangement, then you may wish to make use of a provision in the regulations. This is called an
‘adjustment measure’. This may only be used before 6 October 2015, except in exceptional circumstances. To use the adjustment measure you must notify the employer, members and us at least one month before you intend to use it, providing the date on which the measure will take effect. You should download and complete our form to tell us that you’re using the adjustment measure. Go to ‘Using the adjustment mechanism’: www.tpr.gov.uk/adjustmentmeasure.
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Using the adjustment measure will involve you:
• allocating future contributions to a default arrangement in your scheme which is compliant with the charge cap, or
• no longer accepting contributions for members of a default arrangement that does not comply (which may entail closing the scheme).
Either way, you can give members the option of choosing to remain in the non-compliant default arrangement, if they wish and have confirmed so in writing. For the adjustment measure to be effective you must ensure that you have met the conditions above.
For some trustees, their scheme rules may not currently allow them to take these steps. However, the legislation overrides some scheme rules and some of the processes which might otherwise have to be followed.
You may therefore wish to take advice on what steps you need to take.
Once the adjustment measure has been implemented, and provided you have met the relevant conditions, the cap does not apply to the affected default arrangement.
Non-compliance with the charge controls alone will not mean that your scheme does not qualify for use under automatic enrolment. However, if you decide that you will no longer accept contributions, employers of affected members may need to make alternative arrangements to ensure they are compliant with the rules on automatic enrolment and related employer duties.
Other exemptions applying at scheme level or default arrangement level might also apply. You should take advice if you believe this may be the case.
Our existing DC code of practice will continue to be applicable to your scheme after the new laws come into force, to the extent that it does not conflict with these laws. We will be revising this code in due course, along with the guidance available on our website. This will provide help for you in complying with your existing, and ongoing, duties. View the code and guidance on our website: www.tpr.gov.uk/managing-dc .
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Relevant multi-employer schemes, which include schemes known as
’master trusts’, must comply with some additional governance standards.
These relate to representation and independence on the trustee board, and include some restrictions on how long some trustees or managers can remain in post.
‘Relevant multi-employer schemes’ are multi-employer schemes in which some or all of the employers using the scheme (the ‘participating employers’) are not connected to one another, or which are promoted to employers as schemes where participating employers do not need to be connected. Some exemptions apply.
In these schemes, the following standards must be met, and reported on in the chair’s statement:
• The scheme must have at least three trustees, or where there is a corporate trustee in place that isn’t a professional trustee body, there must be at least three directors. Trustee boards may of course be larger than this, particularly in a large scale and more complex scheme. A majority of these trustees – including the chair
– must not be affiliated with any company that provides advisory, administration, investment or other services to the scheme.
Individuals who also sit on the providers’ investment governance committee may still be considered non-affiliated
• Non-affiliated trustees must be appointed to the scheme in an open and transparent fashion, for example, by a process involving advertising in an appropriate national publication or using the services of a recruitment agency
• Trustees must have a process in place to encourage scheme members, or their representatives, to make their views known on matters that affect them. The chair’s statement must include a description of how this has been achieved
These additional governance rules will apply to all relevant multiemployer schemes, including those whose only members work or worked for employers that no longer participate in the scheme. All members, both deferred and active, must be protected by good governance.
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The essential guide to governance standards and charge controls from April 2015
Information for trustees and managers
© The Pensions Regulator February 2015
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