DC Scheme Quality

The Government has issued a paper setting out a range of measures aimed at improving the quality of workplace DC pension schemes. The main driver for these proposals is auto enrolment where the Government is keen to ensure that workers are joining high qualify pension arrangements.

A number of changes will come into force in two stages, April 2015 and April 2016 including:

  • Governance – minimum requirements apply from April 2015 for all DC workplace pension schemes
  • Scheme trustees will need to provide an independently audited statement confirming that they have met the new governance standards.
  • Contract-based schemes will need to establish Independent Governance Committees (IGCs) to perform a similar role to a trustee board to improve accountability and assess value for money. The IGC will also be required to report on how they have met the new governance standards.
  • In April 2015 the Government introduced a charge cap on default funds of 0.75% and a ban on commission/consultancy charges in DC schemes which can be used for auto-enrolment ("AE") (known as "qualifying schemes"). 
  • There will be a mandatory disclosure of costs and charges in a standard format and a duty on trustees and IGCs to consider and report on these.
  • From April 2016, all active member discount (AMD) structures and member borne commission payments will be banned in qualifying schemes.

The Government proposes the following standards for all DC workplace pension schemes:

  • All schemes must be governed by a body with a duty to act in members’ interests (trustee(s) for trust-based schemes and IGCs for contract-based schemes).
  • The governing body must act in members’ interests and set out how any conflicts of interest are handled.
  • The majority of individuals, including the chair, of the governing body must be independent of the pension provider.
  • Boards of master trusts will face extra requirements on how to address potential conflicts of interest and to demonstrate their independence. 
  • The governing body must consider the design and net performance of default investment strategies; standards of administration; charges borne by scheme members; and costs incurred through investment of pension assets.
  • The governing body must have, or have access to, all of the resources, knowledge and competencies necessary to properly run the scheme.
  • The chair of the governing body must produce an annual report explaining how the scheme has performed against the quality requirements.

Implementation of the new standards will impact on how many trust and contract-based schemes are governed from April 2015.  

The Government’s proposals are intended to ensure that:

  • the charges borne by members in default arrangements are fair, and
  • there is full transparency of all costs and charges.

New disclosure requirements will require:

  • Providers of workplace DC schemes to disclose full information on all charges and costs in a standardised and comparable format to trustees and IGCs.
  • Providers and trustees to provide information, in a standardised comparable format, about charges and costs to employers before the employer selects a scheme and then annually.
  • Providers and trustees to provide information about charges to new and prospective scheme members, and headline charges and costs annually, in their annual benefit statement.
  • The Secretary of State and the FCA to legislate/make rules to require the publication of information about transaction costs and administration charges.

This transparency is designed to enable employers and trustees of workplace pension schemes to understand and compare the charges being paid and assess schemes’ relative value for money.