On 30 October 2013, the DWP released a consultation document seeking views on a range of measures to tackle pension charges to protect employees in workplace defined contribution pension schemes.
The DWP has detailed its plans to impose a 0.75% cap on management fees charged by workplace pension funds and wants to hear from the industry and the public on how it can best design a charging cap that can protect people’s savings, before implementing its plans in 2014.
The consultation document, which is available on the DWP’s website, sets out three options: a hard cap of 1% of assets, a hard cap of 0.75% and a two-tier ‘comply or explain’ capping approach – in which pensions providers would be restricted to 0.75% unless the provider can demonstrate to the Pensions Regulator that the extra cost is justifiable in that it adds value for money.
Originally a cap of 1% had been proposed, but speaking in the House of Commons on 30 October 2013, Steve Webb MP, Minister of State for Pensions, said that he was opting for a ‘tougher option’.
Previously, Steve Webb has stated that the employees currently enrolled to a workplace pension are likely to have the scheme chosen for them by their employer, which could leave them paying excessive charges which would erode pension savings. HM Treasury said introducing a binding charge cap was a ‘crucial step’ in improving value for money, as more small to medium size employers approach their auto-enrolment staging dates.
The Office of Fair Trading has previously called for a clampdown on charges, in a report which warned that ‘… most employees do not engage with, or understand, their pensions’. However, the report did not mention that a cap on charges should be imposed, raising concerns about how costs would be defined and also that providers may see a cap as a target. Indeed, there is a concern in the industry that some providers will seek to exploit the new proposals and increase their charges, bringing them in line with the maximum.
The consultation is much needed. If a cap is set at the right level, it will increase the amount being saved in to workplace pensions and should facilitate auto-enrolment. Further, DWP’s proposal to introduce a charging cap should result in more transparent pension charges, which will allow employers to make more accurate comparisons across different pension providers when selecting a pension scheme for their employees.
Finally, although pension charges should be a priority for providers, they should ensure the governance and quality of the funds does not suffer as a result of the charging cap.
The Pensions Regulator warns against ‘double-counting’ in defined benefit pension schemes
1 November 2013
On 25 October 2013, the Pensions Regulator (TPR) issued a statement reminding both trustees and employers that payments towards section 75 debts cannot also be considered as payments under a schedule of contributions and vice versa. TPR has suggested that to avoid ‘double-counting’, trustees need to assess the impact of an employer departure and deal with the section 75 debt and on-going funding issues separately.
Section 75 of the Pensions Act 1995 (the Act) requires that the debt that is triggered when an employer departs from a multi-employer scheme, be treated as a separate payment from the deficit repair contributions under its recovery plan. However, TPR is currently dealing with a number of schemes where section 75 debt repayments and on-going recovery plan payments have been double-counted. It should be pointed out that treatment of such payments is contrary to the legislation and therefore will not extinguish an employer’s liability under section 75 of the Act.
TPR’s statement highlights the risks of double-counting and explains how it can occur and how it can be avoided. TPR’s Geoff Cruickshank has stated: ‘Double-counting carries significant risks for schemes and members and it is important that trustees understand these risks and how to avoid them. Where we become aware that double counting has occurred we will raise this with the trustees and expect it to be addressed.’
Risks of double-counting include leaving unpaid debts which would be detrimental to scheme assets and impact upon member security. Further, it could potentially render a scheme ineligible for Pension Protection Fund entry purposes. To avoid double-counting, trustees should assess the impact of an employer’s departure and deal with the section 75 debt and on-going funding issues separately.
TPR’s statement also explains how a section 75 debt, which arises on the departure of an employer from a multi-employer scheme, can be dealt with effectively and accounted for under the scheme funding framework.
The statement issued by TPR is timely, as trustees need to ensure that outgoing employers discharge their liabilities to the scheme and do not treat payments due under a schedule of contributions as being the same as section 75 debt payments. Similarly, employers will want certainty that when paying section 75 debts, those monies will be used to extinguish their liability under the scheme, rather than being used for scheme funding purposes.