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If the cap fits

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Ian Neale tackles the complexities of the charge cap.

In pensions – as in life generally – it’s almost a truism that rarely is anything as simple as it might at first seem. It’s often difficult to make a clear statement without feeling a need to recognise exceptions. The ongoing debate about charging is a case in point.

Transparency’ is a keyword in our industry at the moment; particularly in the context of communications to pension scheme members. We should be better informed, not only about the value of our pension, but also about the cost of saving. This is true not only with members but within the industry itself, with complex regulations and rules surrounding the charge cap.  This issue came to the fore with the advent of auto-enrolment, where success depended partly on minimising opt-out rates, and low charges were seen as a key factor in this. 

Many of those auto-enrolled for the first time have joined money purchase occupational pension schemes; particularly master trusts. Consequently, since 6 April 2015, the Occupational Pension Schemes (Charges and Governance) Regulations 2015 have applied charge controls to the default arrangements of certain occupational pension schemes that provide money purchase benefits, used to meet automatic enrolment duties in relation to at least one jobholder (‘relevant schemes’).

Such schemes cannot require a jobholder to make any choices, such as about fund investments, so they have to provide a default fund for those who do not express an option or choice.
Trustees must ensure no member’s funds in a default arrangement are subject to charges in excess of the cap. The annual limit is 0.75%, if charges are calculated solely as a simple percentage of members’ funds over the course of a ‘charges year’.

So far, so good; and indeed, 0.75% has turned out not to be so formidable a challenge for asset managers to meet as was feared; much as the 1% cap on stakeholder pensions announced in the year 2000 proved to be more attainable than at first claimed.

However, trustees might be responsible for more than one default fund, without necessarily realising it. Once an arrangement has been identified as a default subject to the cap, it will remain a default subject to the cap.  If the employer starts enrolling new joiners into a new default, the funds invested in the old default will still be protected by the cap.

Trustees of schemes not specifically set up for auto-enrolment might also be offering more than one default fund. This is the case where an employer contractually enrolls new workers before they become jobholders eligible for automatic enrolment and the workers are required to choose a fund at that point.  A fund to which at least 80% of them choose to contribute becomes a default fund and as such, subject to the charge cap.
The same rule applies to an arrangement which, on or after 6 April 2015 (or the employer’s staging date if later), already had contributions from at least 80% of the workers who were active members of the scheme, where those workers were required to make their own fund choice.

This means that where at least 80% of workers who had to make a choice have opted, for example, for a sharia fund, or a ‘green’, ‘environmental’ or ‘ethical’ fund, that fund must be designated a default fund for that employer.
The charge cap does not apply to arrangements that are only receiving AVCs. Also, in the case of a multi-employer scheme, the default arrangement for one employer will not necessarily be a default arrangement for another; different employers can have different default arrangements.
Identifying default funds is only the beginning: much more complexity lies in the process of measuring charges to make sure they are compliant with the cap. That’s another story…
Ian Neale, Director, Aries Insight