Emma Martin highlights the top five issues for trustees of defined contribution schemes.
1. Pension flexibilities
Most schemes will by now have made their decision about whether to offer any of the new flexibilities (single cash lump sum, a series of smaller cash lump sums or drawdown), whether within the scheme or through a tie in with another provider, at least in the interim. Once this decision has been made, the next steps are reviewing the scheme rules, investment strategy and communications.
Scheme rules may need to be amended to take account of the new flexibilities (whether new options are being offered within the scheme or not), even if the scheme has been relying on the statutory override to date.
The scheme's investment strategy, particularly in relation to the default arrangement/s should also be reviewed. Trustees should consider whether the strategy remains appropriate for their membership, depending on what members are likely to do at retirement. Again, this is relevant whether the scheme is offering the new flexibilities in scheme or not, as members can still transfer out to another scheme to access them.
Member communications will also need to be reviewed and updated. Member booklets and scheme websites should explain which retirement options are available from the scheme, while retirement communications must take account of the new disclosure requirements and, for example, signpost Pension wise. Trustees should also give consideration to the Pensions Regulator's guidance on the provision of generic risk warnings at the point of retirement.
2. DC transfers
Trustees of schemes which are not providing some or all of the flexibilities are likely to be seeing an increase in transfer-out requests from members keen to access the new options.
Trustees should therefore review their transfer-out process to ensure it complies with the new statutory regime and to consider if any rule amendments are required or desirable. Transfer documentation may also require updating.
It is more important than ever to be aware of potential pension scam vehicles in light of the new flexibilities. Trustees should make sure that the due diligence process carried out on the receiving scheme is sufficient (and has been updated to take account of the revised "QROPS" conditions from 6 April 2015 and the revisions to HMRC's "ROPS" list). The Pensions Regulator's "Scorpion" material should also be included in transfer packs.
3. Minimum governance standards and chair's annual statement
There is now a mandatory requirement to complete an annual chair's statement in relation to the new minimum governance requirements introduced in April.
This must be produced within seven months of the scheme year ending on or after 6 July 2015 and cover the period from 6 April 2015 to the scheme year end. The first step for trustees is to understand what the scheme year is for the purposes of the governance requirements.
Trustees also need to know what the new governance requirements are (for example, prompt and accurate processing of financial transactions and an assessment of whether the costs and charges borne by scheme members represent good value) to ensure they are compliant with them. This is likely to involve asking for information from scheme administrators, platform providers and/or investment managers.
4. Charge cap
Since 6 April 2015 (or from an employer's staging date if later), there is an annual 0.75% cap (or equivalent) which applies to all member borne deductions in relation to "default arrangements" in schemes which are "qualifying schemes" for auto-enrolment purposes, which provide DC benefits and which had active members on that date.
The Pensions Regulator has included an additional question in its 2015 DC scheme return relating to the new charge restrictions. Trustees will need to confirm whether the scheme has been compliant with the new requirements.
5. Short service benefits
Any new joiners to a scheme on or after 1 October 2015 will become entitled to vested benefits after 30 days' qualifying service, rather than the current two years. This means they will not be entitled to a refund of their contributions after 30 days' qualifying service.
From 1 October any payment of a refund of contributions to these members after 30 days would be an unauthorised payment, resulting in adverse tax consequences.
These legislative changes will not necessarily override scheme rules.
It is important to check whether amendments are required. Member communications, particularly the scheme booklet, are also likely to need updating. Any changes should be made before 1 October so urgent action may be needed.
Emma Martin is senior associate at Sackers
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