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02nd November 2015

Banning member-borne commission in occupational pension schemes

Background

Regulations introduced a charge cap of 0.75% of funds under management in default arrangements of occupational schemes used for auto-enrolment that provide money purchase benefits with effect from 6 April 2015.

From April 2016, those regulations will ban charge structures where the charge imposed on a member is increased when they stop contributing to the scheme, for instance because they leave their employment.

The DWP is now consulting on banning member-borne adviser commission payments in occupational schemes used for automatic enrolment that provide money purchase benefits with effect from 6 April 2016 for new commission arrangements and from later in 2016 for existing arrangements.

What is the scope of the ban?

Some schemes, including small self administered schemes and executive pension schemes are excluded from the ban and charge cap. The intention is that:

  • The ban will not cover advice or services provided by an adviser to trustees. Trustees can still use member-borne charges to pay for advice that they need or are required to obtain.
  • Members can still choose to enter into agreements with advisers for advice and/or services. Conditions will be introduced to protect members in those situations. The consultation asks whether the cost of advice and/or services that members have elected to access should be borne by member’s funds.
  • The ban will prevent member-borne charges being used to pay for any advice or service the employer obtains from an adviser. Employers can still seek advice, but will have to bear the costs themselves.

How will the ban be enforced?

The Pensions Regulator will be responsible for enforcing the ban. The consultation outlines two options for implementing the ban:

  • Requiring trustees to ensure that members are not charged for commission payments to advisers in relation to new arrangements and to use their best endeavours to remove existing member-borne commission payments (reporting the steps they have taken to the Pensions Regulator if they are unable to remove them).
  • Preventing service providers from imposing a charge on members to recover the cost of commission payments to advisers in relation to new arrangements and requiring them to remove any existing member-borne commission arrangements (with trustees confirming to the Pensions Regulator whether arrangements are commission free via the scheme return).

The consultation closes on 27 November 2015. Draft regulations will be published with the DWP’s response.

For more information, please contact Christopher Nuttall on 01604 463134 or click here to email Christopher.

For more information on our Pension Services please visit our Pension Service Page.

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