My Lords, I am satisfied that this instrument is compatible with the European Convention on Human Rights. The instrument was passed by the House of Commons on 3 March 2015 and, subject to your Lordships’ approval, will come into force on 6 April 2015.
As noble Lords will be aware, automatic enrolment has got off to an excellent start. We now have more than 5 million people enrolled in a workplace pension scheme. As we move towards our goal of automatically enrolling 10 million workers, we must be sure that their pension savings are invested in well governed schemes with fair and reasonable charges. The regulations will protect members in occupational schemes from high and unfair charges and will introduce new governance standards. The Financial Conduct Authority will introduce similar provisions for workplace personal pension schemes, which will come into effect on the same date.
First, the regulations introduce measures to control the level and types of charges in pension schemes used by employers to meet their automatic enrolment duties. There will be a cap on charges in the default arrangement within these schemes, protecting savers who have had little or no engagement with their pension savings.
Broadly speaking, a default arrangement is the arrangement into which a member contributes if they have not made an active choice about where their savings should be invested. Historically, not all schemes have had that sort of default arrangement. The regulations therefore set out two further tests to identify arrangements which are used in a similar way to the “true” defaults. In order to ensure member protection, they, too, will be subject to the cap.
The charge cap will be set at 0.75% annually of funds under management, or an equivalent combination charge. The regulations also restrict the charging structures that schemes may use in their default arrangement. Schemes must use either a single funds-under-management charge or a funds-under-management charge in combination with either a contribution charge or a flat fee. The cap covers all costs and charges relating to general scheme and investment administration. Transaction costs, along with a small number of other costs—including those associated with providing death benefits—are not included. The regulations provide two methods by which trustees can measure whether charges in their default arrangements have complied with the cap. They may decide which of these methodologies to use, depending on how they levy charges on members.
The regulations also ban active member discounts from April 2016. By these, we mean charges imposed on a member’s pot which are increased when they stop contributing to the scheme—for example, because they leave their job.
All of these measures on charges apply to occupational schemes offering money purchase benefits which are used by employers to meet their duties under automatic enrolment. They do not cover those schemes which include a promise to the member about the benefits that they will receive.
Secondly, these regulations set out minimum governance standards for relevant occupational pension schemes. These require trustees or scheme managers
to ensure that default arrangements are designed in members’ interests and kept under review. They also require that core financial transactions are processed promptly and accurately, that trustees report on the level of charges and costs borne by scheme members, and that they assess the value of such costs and charges.
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To ensure that trustees have appropriate freedom in how they govern their schemes, the regulations also ensure that trust deeds and rules do not tie trustees into using particular service providers. This requirement overrides any conflicting provisions of the scheme.
Where a scheme does not already have a chair in place, the regulations require that the trustees appoint one. The chair will be responsible for signing off an annual statement on how the minimum governance standards have been met.
We also want to strengthen the independent oversight of schemes used by multiple employers—what we commonly call master trusts. The regulations therefore require that relevant master trusts have a minimum of three trustees. The majority of these trustees, including the chair, must be independent of any providers of services to the scheme. This will apply to schemes used by employers who are not part of the same corporate group.
We have made a temporary exemption to these master trust independence requirements for schemes set up by statute in order to further investigate the level of governance requirements that already exist in these schemes. The National Employment Savings Trust, NEST, is exempt from these independence requirements, as it already has rigorous governance requirements required by statute.
The regulations also require master trust trustees to be subject to limited-term appointments and to be appointed via open and transparent recruitment processes. Taken together with the new requirement that trustees must make arrangements to encourage the airing of members’ views, this will help to ensure that master trusts have members’ interests as their priority.
The governance measures have a wider scope than the charges measures and will cover occupational schemes offering money purchase benefits, regardless of whether they are being used for automatic enrolment.
These regulations introduce a comprehensive package of measures to ensure that savers’ interests are put first by protecting members from high and unfair charges and the consequences of poor governance. I commend them to the Committee.