The tail end of September saw widespread media coverage of an Office of Fair Trading Report (OFT) on defined contribution workplace pension schemes. We provided a summary of the key findings in our October bulletin and this document concentrates on one of those key areas, which was that the OFT wish to ensure that employees who are being automatically enrolled into company pension schemes will receive value for money over the longer term.
The OFT identified 3 elements of a company pension scheme which should be regularly assessed and scrutinised as part of the employer’s scheme governance to ensure the pension continues to provide value for money for the members:
• Scheme charges
• Design and Execution of the scheme investment strategy
• Administration of the scheme and communication with members
Wingate’s annual scheme governance reviews, which are part of the service we provide to all clients, report on all these elements but we have provided some additional commentary below.
In 2011, we reported that the Pensions Regulator (TPR) had concerns over the fairness of Active Member Discounts (AMD’s) and the OFT report has enforced these views. The OFT has called for a ban on the establishment of new schemes with ‘Active Member Discounts’ (AMD) or the use of such schemes for employees being automatically enrolled in to a company pension scheme.
If a Group Pension Scheme has an AMD, it means that ‘active’ members (those employees who are making regular contributions to their pension) will benefit from a lower charge than a member who is not making contributions or has left the scheme.
Simply as an example, a scheme with an AMD charging structure could have an ‘active’ annual management charge (after a discount) of 0.70% which is levied on the fund value for the employees personal pension. This could be increased to 1.50% if an employee leaves the scheme or ceases their pension contributions. In this example, the charge for ‘active’ members is less than the 1% charging cap introduced for Stakeholder pension schemes in 2001 but the charge for members no longer contributing is higher.
This 1% charge has been the benchmark for pension schemes since 2001 but following the introduction of NEST, which is the Government sponsored low cost pension scheme brought in as an option for Auto Enrolment, we are seeing the benchmark for new pension scheme charges reducing towards an annual management charge of 0.5% of the member’s pension fund.
Commission Payments and Fees
The charges levied on a scheme may include the provision of commission payments to an adviser which may fund the cost of any services they provide. It is our view that these commission payments will cease over the coming years or even months (they have already been banned for new schemes) at which time the cost of any services you receive from your advisers would need to be borne by the company directly.
Employer’s have the option to remove commission from their schemes now, which would probably reduce the charges levied on the scheme members and provide an opportunity for the basis of the charges to be restructured to reflect the OFT and Pension Regulators views. The cost of any advice and/or the scheme governance and management services you receive would then need to be paid separately to the advisers.
The OFT has recommended to the Department for Work and Pensions that they consult on improving the transparency of scheme charges and on preventing schemes being used for auto enrolment if they contain in-built commissions or that penalise members with higher charges when they stop contributing into their pensions.
If you have any questions on how these issues may affect your business or the plans you are making for auto enrolment, then please contact us.
Wingate Benefits Solutions have extensive knowledge of the Workplace Pension market and are here to assist you in the planning, implementing and management of company pension schemes.
Tax and legislation are liable to change. This information is based on WBS’s current understanding of UK law and HM Revenue & Customs practice and legislation we believe may apply in the future. No guarantees are given regarding the effectiveness of any arrangements entered into on the basis of the information contained herewith. It is recommended that professional advice is sought prior to entering into any financial arrangement.