This guidance applies to the trustees of a master trust that experiences a triggering event on or after 1 October 2018, where the requirement to produce an implementation strategy applies.
Published: November 2018
Introduction
It is important that members do not incur any additional costs as a result of dealing with a triggering event and the trustees are prohibited from increasing or imposing new charges on members during a triggering event period (TEP). In addition, they must not impose any charges as a consequence of the member leaving or deciding to leave the scheme during the TEP (charges prohibition).
The prohibition on increasing or adding new charges extends to master trusts receiving a transfer in of accrued rights or benefits of members to the extent that these are costs from the transferring scheme or relate directly to the transfer in of accrued rights or benefits. This applies where that transfer has come from a scheme that experienced the triggering event and is pursuing continuity option 1. We set out how the trustees can comply with the charges prohibition in each of these scenarios below.
Administration charges[1]
The charges prohibition applies to administration expenses of the scheme, commission payments or any other payments (other than those resulting in benefit payments to members) which are met by contributions, investment return or are otherwise from a member’s pot. It should be noted that the charges prohibition extends to wind up costs as well as other administrative charges. However, the prohibition does not extend to[2]:
- transaction costs — these are the variable costs incurred as a result of the buying, selling, lending and borrowing of investments
- the costs of complying with a court order
- charges associated with pension sharing on divorce and earmarking orders; and
- the costs which are solely associated with providing death benefits
Additional charge
This relates to an administration charge for advice, service or information provided to a member, including where a member requests a transfer to another scheme. Examples include: charges for copies of annual benefit statements, transferring to another scheme or purchasing an annuity, or for non-statutory CETV requests.
Third party charge
An administration charge imposed on or in respect of a member by a person other than the trustees, for example the cost of financial advice.
Discounted levels
Where a lower level of administration charge applies to members in particular circumstances, including members from a particular employer or to a member according to the value of the member’s rights in the master trust.
Charge structure
The type of charge structure(s) used. Includes charges relating to a single percentage charge of funds under management, percentage of contributions, fat fees or a combination charge structure[3].
Bespoke pricing model
Where the charge level and charge structure is determined according to the unique characteristics of (or factors relevant to) each new employer or member group.
Footnotes for this section
- [1] Section 39(1) of the Pensions Act 2017
- [2] Regulation 25 of the Occupational Pension Schemes (Master Trusts) Regulations 2018
- [3] Regulation 5 of The Occupational Pension Schemes (Charges and Governance) Regulations 2015
Where the master trust experiences a triggering event
Following a triggering event, the trustees are required to submit an implementation strategy to us for approval, setting out how the interests of members are to be protected. This must include certain specific information, including how the trustees will pursue a transfer out of members’ benefits and wind-up of the scheme (continuity option 1) or resolve the triggering event (continuity option 2).
The implementation strategy must include a section on administration charges that apply to members and are calculated in accordance with requirements set out in legislation. This is done by comparing charges between two charges years in order to determine the fixed charge levels for the course of the TEP[4]. It’s important to note that this is not the same as the charges statement included as part of the continuity strategy (which covers charges as at the last review), although this statement may help to inform your calculations for setting out the charges statement in the implementation strategy.
Determining the fixed charge levels
Step 1: Set out the charges for the scheme year in which the triggering event occurred.
Step 2: Set out the charges for the scheme year before the one in which the triggering event occurred.
For each scheme year under steps 1 and 2, the trustees must set out on an annual basis all levels of charges, including any discounted levels, that apply to the following:
- each charge structure for every arrangement, including the default arrangement (by charge structure, we mean a single or combination charge structure). You should also include details of charges for any arrangements available to members, but were not taken up
- additional, third party, or other charges that apply
We would expect you to detail the charge, the amount and reason for imposing these charges and a description, and the amount of any discounted level. The reasons for any discounted level should also be included. To the extent possible, we expect each charge level identified to be mapped against:
- the relative size of assets under management
- the total number of members subject to the charging level
- the total number of employers subject to that charging level
Where the master trust operates a bespoke charging model, we expect the trustees to set out the charges that applied or would have applied to current scheme members, for each of the scheme years in steps 1 and 2.
Step 3: Compare like for like charge levels between both scheme years. You must take the lower of the two levels as the fixed charge level[5], which must apply for the duration of the TEP. Where a TEP is shorter or longer than a full year, the fixed charge levels apply on a pro rata basis.
Approval of the implementation strategy (in relation to charges)
The principle behind the charges prohibition is that members do not incur the costs of dealing with a triggering event. We are therefore more likely to consider the charges section of the implementation strategy to be adequate where the trustees can demonstrate that members will not incur the costs of transfer and wind up, or costs of resolving a triggering event. Where there is a shortfall between such costs and money available to trustees to meet them, the trustees should set out how they plan to use the financial reserves available to them to meet costs as they fall due.
It is possible that members could incur higher charges as a result of transfers between different arrangements of the master trust during a TEP. As the implementation strategy must set out how members’ interests are protected following the occurrence of the triggering event, we expect trustees to set out in the implementation strategy how they will protect members against this risk. We are more likely to approve the implementation strategy where the trustees have taken steps to ensure only investment switches take place between different arrangements where this is at the member’s own request.
Mixed benefit schemes
We recognise that there are certain complexities surrounding master trusts providing both money purchase and non-money purchase benefits in determining how wind-up costs are to be met. This may be partly dependent on the scheme’s trust deed and rules and whether or not the scheme is segregated or not.
In complying with the charges prohibition, the law provides for an override of any provision of the master trust scheme to the extent there is a conflict. Trustees of master trusts providing mixed benefits should review their arrangements to ensure they do not increase or impose new charges on members where this is prohibited during the TEP.
Footnotes for this section
- [4] See regulation 18 of the Occupational Pension Schemes (Master Trusts) Regulations 2018
- [5] See regulation 18 of the Occupational Pension Schemes (Master Trusts) Regulations 2018
Master trusts receiving a transfer of members
Trustees of the receiving master trust are prohibited from increasing or imposing new charges on members in respect of costs incurred by the transferring scheme, to the extent that these are costs from the transferring scheme or relate directly to the transfer in of accrued rights or benefits. However, this does not mean that a receiving scheme is required to lower their charges to match those of the transferring scheme. They must ensure they do not increase or impose new charges above levels they would normally have charged in order to recover costs that were incurred by the transferring scheme or which relate directly to the transfer from that scheme[6].
The trustees of the receiving master trust must provide us with a document[7] setting out how they will comply with the charges prohibition, which must be provided to us within 28 days beginning with:
- the date the receiving trustees received the first notice from the trustees of the transferring scheme, confirming that their scheme has been selected as the trustee default scheme, or
- the date the receiving trustees received notice from the members’ employer that they have selected their scheme as the employer default scheme
The document must include the charges statement provided in the scheme’s most recent continuity strategy submitted to us, which falls outside of the TEP in relation to the transferring scheme. More information about the requirements in relation to the continuity strategy can be found in our code — paragraphs 166-176.
You must also include a statement setting out how you have ensured no increases or new charges will be imposed on members above those detailed in the charges statement[8].
You must also state whether you are liable for any costs passed on from the transferring scheme and/or costs resulting from the transfer in of accrued rights or benefits[9]. Where you are liable for costs, you must set out how you intend to meet these without passing them on to members.
Footnotes for this section
- [6] Section 33(2) and (3) of the Pension Schemes Act 2017
- [7] Section 24(5)(i) of the Pension Schemes Act 2017 and regulation 20 and paragraph 13 of Schedule 5 to the Occupational Pension Schemes (Master Trusts) Regulations 2018
- [8] Regulation 20 and paragraph 13(7)(a) of Schedule 5 to the Occupational Pension Schemes (Master Trusts) Regulations 2018
- [9] Regulation 20 and paragraph 13(7)(c) of Schedule 5 to the Occupational Pension Schemes (Master Trusts) Regulations 2018