Default arrangements and charge restrictions

The law sets out how to identify a ‘default arrangement’ within a DC pension scheme.^DE1

Governing bodies will need to assess whether any of their investment arrangements satisfy one or more of the default arrangement descriptions set out in the legislation.

This assessment will need to allow for a default arrangement being formed from a single investment fund or collection of funds.

In certain circumstances and for certain schemes, the law restricts charges that may be imposed on members.^DE2

There are legal restrictions on the amount members can be charged in default arrangements used by employers to meet their duties under automatic enrolment legislation.^DE3 Some types of charge or cost are excluded and do not count against the charge cap, for example transaction costs.

The law also places restrictions on the charging structures that can be used in such default arrangements, prohibiting all but two types of charging structure: a single percentage charge calculated by reference to the value of the member’s rights under the scheme, or a specified combination charging structure.^DE4

It is against the law to charge more to non-contributing members than they would have had to pay had they been contributing members (also known as active member discounts).^DE5 This ban applies to all investment arrangements within a relevant scheme, not just the default arrangement.

Additionally, the law bans member borne commission,^DE6 and governing bodies must report to us any service providers who have such a commission arrangement in place.

The ban applies to all arrangements within a scheme used by employers to meet their duties under automatic enrolment legislation.^DE7

Governing bodies should:

• document how they identify whether default arrangements observe the charge controls
• have processes in place to identify and report any activities involving charging members commission^DE8