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Default arrangements and charge restrictions

Code in force: 28 March 2024

The requirements of the law to which this module relates are very complex. We recommend governing bodies consider appropriate professional advice and all relevant guidance, including government guidance, to ensure their scheme complies.

Default arrangements

  1. The law sets out how governing bodies can identify a ‘default arrangement’ within their defined contribution (DC) pension scheme1. 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.
  2. Governing bodies must ensure that they comply with the relevant default arrangement governance standards (see Investment governance), including those relating to a default arrangement statement of investment principles, and the periodic review of such arrangements2 (see Statement of investment principles). They will also need to consider member-borne costs and charges for any default arrangements in their assessment of value for members (see Value for members).

Charges and cost restrictions

  1. There is a legal limit on the amount members can be charged3 in default arrangements within DC schemes used for automatic enrolment4, known as the charge cap5. Some types of charge or cost are excluded and do not count against the charge cap, for example transaction costs.
  2. There are only two types of charging structure allowed under the cap – a single percentage charge calculated by reference to the value of the member’s rights under the scheme within the default arrangement, or a specified combination charging structure6.
  3. 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)6. This ban applies to all investment arrangements within a relevant scheme, not just the default arrangement. Additionally, the law bans member-borne commission7, 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 legislation8.
  4. Governing bodies should:
    1. document how they identify whether default arrangements observe the charge controls, including the calculation process
    2. have processes in place to identify and report any activities involving charging members commission9
    3. where restrictions on costs and charges have been breached, consider whether this must be reported to us (see Decision to report)

Glossary and legal references

Relevant scheme

Schemes defined by Regulation 1(2) of the Occupational Pension Schemes (Charges and Governance) Regulations 2015.

1Regulation 1(2) Occupational Pension Schemes (Investment) Regulations 2005 [Regulation 1(2) Occupational Pension Schemes (Investment) Regulations (Northern Ireland) 2005]

2Regulation 2A Occupational Pension Schemes (Investment) Regulations 2005 [Regulation 2A Occupational Pension Schemes (Investment) Regulations (Northern Ireland) 2005]

3Part 2 Occupational Pension Schemes (Charges and Governance) Regulations 2015 [Part 2 Occupational Pension Schemes (Charges and Governance) Regulations (Northern Ireland) 2015]

4Regulation 2(1) and 3 Occupational Pension Schemes (Charges and Governance) Regulations 2015[Regulation 2(1) and 3 Occupational Pension Schemes (Charges and Governance) Regulations (Northern Ireland) 2015]

5Regulation 6 Occupational Pension Schemes (Charges and Governance) Regulations 2015 [Regulation 6 Occupational Pension Schemes (Charges and Governance) Regulations (Northern Ireland) 2015]

6Regulation 5(1) Occupational Pension Schemes (Charges and Governance) Regulations 2015 [Regulation 5(1) Occupational Pension Schemes (Charges and Governance) Regulations (Northern Ireland) 2015]

6Regulation 11 Occupational Pension Schemes (Charges and Governance) Regulations 2015 [Regulation 11 Occupational Pension Schemes (Charges and Governance) Regulations (Northern Ireland) 2015]

7Regulation 11A(2) Occupational Pension Schemes (Charges and Governance) Regulations 2015 [Regulation11A(2) Occupational Pension Schemes (Charges and Governance) Regulations (Northern Ireland) 2015]

8Regulation 6 Occupational Pension Schemes (Charges and Governance) Regulations 2015 [Regulation 6 Occupational Pension Schemes (Charges and Governance) Regulations (Northern Ireland) 2015]

9Regulation 11A(2) Occupational Pension Schemes (Charges and Governance) Regulations 2015 [Regulation 11A(2) Occupational Pension Schemes (Charges and Governance) Regulations (Northern Ireland) 2015]