Banning member-borne commission in occupational pension schemes

Background

The DWP is consulting on the best way of regulating a ban on member-borne commission payments in relevant occupational pension schemes that provide money purchase benefits and which are being used as qualifying schemes for automatic enrolment.

The consultation proposes two options (and an alternative):

• Option A: a duty on trustees of occupational pension schemes used for automatic enrolment to ensure that members in the schemes they are managing are not subject to any new member-borne commission charges; and to use best endeavours to remove any such existing member-borne commission arrangements.
• Option B: a duty on service providers preventing them from imposing a charge on members to recover the cost of commission payments to advisers in relation to any new commission arrangements; and to remove any such charges in relation to existing commission arrangements.
• Alternative option: a duty on both trustees and service providers which prevents them entering into new member-borne commission arrangements and a requirement on both to remove any such existing arrangements.

It is intended that the ban will be phased in, applying to new member-borne commission arrangements from 6 April 2016 and to existing arrangements at a later date.

In this response

• General comments
• Principles for banning member-borne commission in occupational pension schemes: Scope of the ban
• Responsibility for complying with the ban
• Timing

General comments

We support the Government’s initiatives towards better workplace pensions and welcome the opportunity to comment on present consultation.

As legal advisers to trustees, employers and providers of workplace pension schemes, we set out below our comments on various aspects of the consultation that are relevant to our practice. We do not seek to answer every question in the consultation.

Principles for banning member-borne commission in occupational pension schemes: scope of the ban

We agree that it is appropriate to target qualifying schemes used for automatic enrolment, and all arrangements within such a scheme, not just the default arrangement. We also agree with the focus on money purchase (or defined contribution (DC) schemes), as well as money purchase benefits offered by non-money purchase schemes.

Furthermore, we agree that it is important that members remain free to opt for an adviser’s advice or other services, should they wish to do so. Similarly, employers should be able to access professional advice where they pay for the service themselves; trustees should also be able to access advice and services where necessary.

Exceptions

The DWP proposes excluding small self-administered schemes, executive pension schemes and single member schemes from the ban, in line with the default fund charge cap. For the reasons given, including the fact that members of such schemes tend to be engaged and therefore at less risk than those who do not make active choices about their investment, we agree with the proposed exceptions to the ban.

Application to new and existing arrangements

We understand the need to obtain the best outcomes for members, which may involve treating new and existing arrangements in a similar manner. However, whilst ensuring that commission is not included in new arrangements should be reasonably straightforward (for example, establishing whether such commission is present will form part of standard due diligence enquiries), it is likely to be more difficult to assess in existing arrangements.

The unwinding of existing commission arrangements is a significantly different prospect to ensuring that new agreements or contracts do not include member-borne commission payments. Commission payments in legacy arrangements are likely to have been contractually agreed between the parties and form a fundamental part of the overall set-up of the arrangement. As such, it may be difficult remove such commission payments without upsetting the balance of the arrangement, and, in individual cases, thought may need to be given to restructuring. We therefore believe that, whilst it will generally be reasonable to review existing commission arrangements, it should be accepted that it may not be possible in all cases to unwind them.

Responsibility for complying with the ban

DC scheme trustees are currently grappling with significant new responsibilities relating to governance. We therefore feel that placing the obligation for compliance with the proposed ban solely on trustees would be to give them an extra burden at a time when they are already under pressure.

As the consultation notes, commission arrangements can take various forms. If Option A is selected, trustees may find it difficult to fully understand and analyse the extent of any such arrangement, particularly as they “may be one step removed from the commission arrangement, which is typically agreed between the service provider and the advisers”. In addition, under Option A, it is proposed that trustees will use “best endeavours” to remove any existing member-borne commission arrangements. This is a high test to meet. For these reasons, if Option A is adopted, it would be helpful for trustees to have guidance to help them understand the extent of the investigations that they would need to carry out, information on the various types of commission payment to look out for, and guidance on the extent to which they can rely on confirmations given by the provider.

Timing

In practice, it will depend on which option is chosen as to how quickly those responsible can get up to speed with the new regulations when they come into force. If the responsibility is to fall on trustees, they will have little time, between the publication of regulations (both in draft and in final form) and the new duty coming into force, to ensure that they have adequate processes in place to be able to comply with the new duty.