The National Association of Pension Funds has written to the government to demand clarification on the movement of non-default members between funds, to ease trustee uncertainty around charge cap regulations.
In its letter to the Department for Work and Pensions last week, the NAPF called for clarification on key areas of the regulations, including concerns about non-default investment funds being unintentionally included within the 0.75 per cent charge cap on auto-enrolment default plans.
The issue centres on whether people have expressed a choice to be in the fund in which they are invested.
A default fund is broadly defined in the DWP’s 2015 Occupational Pension Schemes Charges and Governance Regulations as “an arrangement under which the contributions of one or more workers are allocated to a fund or funds where those workers have not expressed a choice as to where those contributions are allocated”.
Trustees of DC schemes need to start thinking about how this might impact the funds they have in place
Ian D'Costa, Sackers
However, if trustees wish to conduct such a ‘mapping’ exercise to move non-default savers from old fund selections to new ones – as per their fiduciary duty to regularly review the funds offered – the new fund could be viewed as a default, and could therefore be subject to the 0.75 charge cap.
In the letter, Richard Wilson, policy lead for DC pensions at the NAPF, said: “The uncertainty over whether such funds are covered by the cap is causing schemes concern and expense as they take advice and trawl records.
“It could also discourage trustees from reviewing and updating the investment choices within their scheme which would not be in savers’ interests.”
Pensions lawyers have echoed the NAPF’s concerns. Anthea Whitton, partner and head of the Leeds pension practice at law firm Squire Patton Boggs, said: “The bit that everyone is worrying about is, if the trustee makes that decision, is it still the member that’s made the choice to be in the fund? Albeit it’s in their interests but they haven’t made the specific choice.”
Ian D’Costa, associate director at law firm Sackers, said many schemes may have already undertaken large mapping exercises.
“Trustees of DC schemes need to start thinking about how this might impact the funds they have in place,” he said.
Call for clarity
Penny Pilzer, DC policy consultant at the NAPF, said it would not be reasonable to require trustees to treat a new investment fund as a default if it is consistent with the member's choice.
“The language of the regulations does not require them to do so and it should not be difficult for the DWP to confirm that it was not the policy intention that mapping exercises be revisited or members who chose alternative investments to be swept into default funds,” she said.
When questioned on the industry’s call for clarity, a spokesperson from the DWP said: “The industry needs to consider whether a particular fund or arrangement is subject to the cap before making any decisions involving members’ money.”
However, Geoff Egerton, associate at law firm Linklaters, said while he had encountered a number of clients who had been prompted to seek advice on this issue by their advisers, communicating members’ options could help alleviate some issues.
“We would encourage trustees to remind members in the more expensive funds of the option to switch funds for past and future contributions,” said Egerton.
“That would minimise risk to trustees and will also raise the issue to the member that they can reconsider and assess their investment on its own merit.”
