Chapter 6 - Defined Contribution Schemes

Question 1

Personal & Stakeholder pensions - how built up and funds are what (2), when bens assessed, what is a stakeholder and difference to pp

GPP - what is it (short sentence)

SIPP - what is it and what can they do in this (e.g. 2)

RACs -what is it and how bens offered (2), GAR better than what but also…, bens need to be what and e.g.

Answer 1

Contributions paid built up in fund and usually unit linked or with-profits. Bens accessed at NPA. Stakeholder pension is low cost personal pension and difference is that SK subject to minimum standards (e.g. charges, investment choice, min conts etc).

GPP or GSP - series of individual DC arrangements for workplace scheme.

SIPP - a personal pension scheme with much wider investment choice e.g. can invest directly in shares and can borrow funds from bank.

RACs - personal pension plan but bens offered can differ in two ways;

• some offer GAR at retirement
• death bens depends on rules and can be restrictive e.g. no return, return of conts with no interest or same with interest.

GARs usually better than open market but more restrictive (specific age etc). Therefore bens of GARs need to be weighed up for each case (if want spouse pension and only on single basis no point).

Question 2

Occupational DC schemes - work same as, who sets up and includes what (2)

Small self-admin schemes - aimed at who, max amount of members, trustees and why do they offer sep pension option (2)

Section 32 - designed to what, why transfer S32 over PP (2)

Answer 2

Works same as personal or stakeholder but employer sets it up and sets eligibility requirements and rules (level of conts, age until conts stop, options available).

SSASs - aimed a company directors and senior employees with less than 12 members and all are trustees. Offer separate pension option due to special features and investment options they provide.

Section 32 - prior to a-day, designed to accept bens transferred from occ scheme. Main reason transferring into S32 rather than PP pre aday were;

• GMP from DB scheme transferred over to S32 and must provide this at SPA
• max bens subject to old scheme rules and could therefore be entitled to higher TFC or LSDB.

Question 3

Targeted money purchase schemes - what are they/what do they do, who calcs what needed to do what, how can target be meet and how provided (2) and differences between this and DB (6)

Answer 3

They are hybrid schemes and targeted level of bens determined usually in line with bens provided from DB scheme. Actuary calcs cont rate needed to provide targeted bens and is is regularly reviewed. Bens may be topped up at retirement to ensure they meet target and can be provided by;

• unallocated account held within scheme for this purpose
• additional conts from employer.

Differences between targeted & DB;

• no promise of paying bens & can avoid if not met
• only promised ben is value of DC fund
• early leavers normally only entitled to DC bens
• employer can elect to disconnect targeted scheme to become normal DC at any time.
• Disconnection will have serious effect on bens expected for member
• if become insolvent, then trustees have no claim on assets

Question 4

Eligibility and conditions of membership

GPP - who decided conditions and examples (2)
Occ - who/what defines, offering membership to who and SSASs eligibility requirements

Stat money purchase illustrations - what are this and when they don’t have to send (think work)

Answer 4

GPP - employer decides eligibility for example;

• can join after completing certain amount of time in employment
• membership depends on level of cont e.g. must cont 3% min.

Occ DC schemes - rules of scheme define who can join and when;

• can sometimes offer membership to those that aren’t employees e.g. contractors
• SSASs eligibility requirements more restrictive

Majority of schemes must send illustrations of future pension in real terms at retirement unless annuity contracts of SSASs.

Question 5

Contributions - employers - pensionable salary

In Specie conts - what are they, tax rules mean and how does it work

Rules of IS transfer - must have a what… and this creates and if not created, agreement reached between who and what forms agreement, how transferred (essentially, scheme agrees to do what), if market value lower than cont…

If market value higher than cont solutions (3)

Answer 5

Individual - straight forward and you know the stuff
Employers - pensionable salary can be lower than total renumeration depending on rules

In specie conts - contribution that is in form of asset (e.g. shares). Tax rules means it must be monetary amount so in specie cont works;
- member agrees monetary cont and is transferred
Rules of this are;
- clear obligation to pay contribution of specific amount of money which creates recoverable debt obligation and if not created considered acquisition of new asset.
- separate agreement reached between trustee and member to pass asset to scheme for consideration.
- cash contribution debt is then set against value of asset (i.e. scheme agrees to acquire asset for market value).
- if market value lower than contribution then balance is paid in cash.

If market value of asset higher than contribution can;

• excess assets can be transferred back to member or employer
• scheme could purchase extra assets by making cash payment (arms length and no tax relief gained).
• purchase of asset can be treated as additional cont by member or employer bu must be clearly documented as such.

Question 6

Trust and Contract based schemes - what is trust based scheme and what schemes always have this, what is a CB scheme

Differences - tax relief, expertise and employee feelings

Answer 6

Trust based - employer sponsored scheme, governed by trust deed and has board of trustees. DB always this.
Contract based - outsourced by employer to third party which manage all aspects of scheme.

Some difference in bens they can offer;

• Tax relief - trust based typically net pay method where CB conts made from earnings after tax and NICs deducted.
• TB has trustees with expertise to choose funds and can create good relationship with employers. CB less costly but can be seen as less valuable ben than TB.

Question 7

Master trusts - under a master trust - employer has what, how split and who retains what decisions, what does it offer employers, how is MT cost effective.

AE and master trust - need for what due to what and how does master trust help this and why.

Bens (5) and drawbacks (2)

Answer 7

Under a master trust

• employer has its own division within master arrangement
• one legal trust and one trustee board - trustees retain decision making on investments, providers etc whilst employers make decision over bens and conts.
• employers offered greater simplicity and convenience
• costs for employer running own TB scheme can be avoided therefore MT cost effective

As AE means more people contributing to schemes, there is a need for trustee expertise and master trust makes this more accessible to employers as TB costly to run.

Bens to master trust;

• as above with lower costs, simple and convenient
• members benefit from ongoing management and investment decisions
• one group of professional advisers is needed for whole scheme rather than for each division
• as above but for board of trustees
• consolidating accounting and governance requirement

Drawbacks

• employer unlikely to have any trustee representation therefore may be disengaged from pension arrangement.
• can be issues with conflicts of interest

Question 8

TPR requirements of master trusts - what did Pension Schemes Act 17 intro, TPR published what, auth of MT must ensure (6), what must be reported to TPR and how resolved (2), TRP how power to (2)

Answer 8

Pension Schemes act 17 intro’d auth and supervision regime for master trusts + TPR published draft code of practice. Auth master trust must ensure that;

• persons involved in scheme are fit and proper
• scheme is financially sustainable
• scheme funded meets set requirements (corp body or partnership)
• system and processes are efficient
• adequate continuity strategy.
• must give evidence to TPR they are doing above

Triggering events must be reported to TPR i.e. scheme cannot continue and depending on situation, accrued rights or bens can be transferred or event resolved. TPR has power to intervene or withdraw authorisation.

Question 9

Governance standards for occupational schemes - who covers what type of scheme (2)

Standards require to - what do they need to demonstrate, ensure what are processed, consider what, default arrangements (meet what, prep what and review every…) and if used as qualifying scheme

Relevant multi-employer schemes inc MT must - how much of what and affiliation, how appointed and what in place

Answer 9

Governance - TPR trust based and FCA regs contract-based. Governance standards require scheme trustees and managers of occ scheme to;

• explain how they meet requirements for having knowledge to effectively run pension scheme
• ensure core scheme transactions are processed promptly and accurately
• consider if costs and charges are good value
• meet gov requirements for default arrangements - must prep SOIP and review strategy and performance every 3 years.
• scheme must be compliant with AE legislation if used as qualifying scheme

Relevant multi-employer schemes must comply with additional gov standards including;

• at least three trustees or three directors and must not be affiliated with scheme
• trustee must be appointed in open and transparent fashion
• process in place for feedback

Question 10

Gov standards for occ schemes - charge controls - what do they apply to and what do they limit (2), who are exempt, charges cant be in excess of (2), cap on charges apply to (4), what do not count against cap and trustee should… and what is banned

Answer 10

Charge controls apply to default arrangements of occ schemes being used as qualifying and limit charges and their structure. One member schemes are exempt. Members funds in default arrangement cant be subject to charges in excess of;

• 0.75% measured over charge year
• if charge made up from fund + contr or flat fee then regs specify cap.

Cap on charges apply to;

• professional service payments (e.g. actuary)
• cost of comms (statements etc)
• investment management fees
• ongoing costs such as IT

Transactions costs do not count against cap but trustees should include costs of these when assessing value for money. Not allowed to charge deferred members more than active members.

Question 11

Gov standards for workplace personal pension schemes -

Independent Governance Committees - how many min members, what do they do, particularly concerned with what and key duties;
- act in what, assess what, if problems with what they assess then what can they do and if dissatisfied with outcome then what, must publish what and new duties (2, report what and oversee what)
Also required for what type of policy

Governance Advisory Arrangement - instead of IGC in what scenario

Answer 11

For CB scheme, Gov has intro’d IGCs who have a min 5 members and majority independent. They review and oversee value for money in the accumulation stage. Particularly concerned with default investment funds and charges and key duties are;

• act in interest of members
• assess ongoing value for money in scheme
• if problems with VFM then raise with board and if dissatisfied with action taken they can escalate to FCA, alert members and employers and go public.
• publish annual reports on findings.
• new duties to - report firms policies on ESG issues and oversee VFM investment pathway solutions for pension drawdown.

If smaller and less complex scheme can establish GAA with a third party. Have same responsibilities as above but cost less.

They are required for SIPPs but not personal pension plans.

Question 12

Governance - differences between SSASs and SIPPs
- type of arrangement, governance, regulator, lending to sponsoring employers, investment choice, administration, SMPI, membership (answer each for each scheme)

Answer 12

SSAS;

• type of arrangement - occ
• gov - trust deed and rules
• reg - TPR
• lending to sponsoring employer - yes, up to 50% of assets
• Investments - chosen by trustees
• Admin - greater levels required
• SMPI - not required if all members are trustees
• Membership - employer can restrict who is eligible to join

SIPP

• Individual scheme
• individual contract between member and provider
• FCA
• No
• Chosen by member with bens earmarked
• less admin
• SMPI at least annually
• Anyone can take out

Question 13

Factors to consider and benefits -

NPA - for occ schemes, what must they consider. For pp, when can they take bens.

Income - brief description of scheme pension, LTA and drawdown, what do FCA require for individual pens and does not extend to

Answer 13

Normal Pension Age - for occ, scheme doc sets out NPA. Must consider Age Discrimination Regs as cannot force them to retire at 65. For PP, any age once hit MPA.

Income - can be provided by three methods and what offered depends on rules of scheme (LTA always offered);
- scheme pension - pension paid directly from schemes assets or paid by insurance company.
- LTA - payable by insurance company
- drawdown - draws income via fund directly
FCA requires providers of individual pensions to make members aware of right to open market i.e. buy annuity from insurer. Does not extend to occ schemes but regarded as good practice.

Question 14

Factors to consider and bens - ill health - pension contribution insurance - when to take this out, allows for what for what schemes and date, where are premiums paid and tax relief, when claimed what happens + tax relief, contract limit and when do payments begin.

Waiver of contribution - date, where conts paid and if claimed, provider must do what on retirement or dearth and since 04/06 what?

Permanent health insurance - what is it

Answer 14

Instead of paying conts during incapacity or ill health (but not meeting ill health pension criteria), can take out pension contribution insurance. This allows contributions to be paid if unable to work due to ill-health and applies to PP or SK set up post 04/01.

Premiums paid into separate insurance contract and not eligible for tax relief but if claimed and contribution paid by insurance, they do get tax relief. Most contracts limit amount to £3.6k to ensure full tax relief. Payments begin after deferred period (us 26 weeks).

For pre 04/01, those incapacitated covered by waiver of contribution. Contributions in respect of waiver of contribution are paid directly into PP and when claimed no further contributions will fall during this period. Provider must pay full value of bens on retirement as if contributions had still been paid. Since 04/06 WOC not eligible f or tax relief.

IPI/PHI - scheme pays income to employee in the event of ill health so they can continue to make £3.6k conts

Question 15

Factors to consider and bens - Death bens - Life cover -

Personal Pension Term Assurance - premiums lower than what so what need to avoid and how and employers payments

Group death in service schemes -contribute into what to provide what

Death in retirement - what can they provide and deferred if

Answer 15

Personal Pension Term Assurance - premiums lower than normal TA so to avoid pension schemes being set up purely as life cover options, cannot receive tax relief on contributions for stand-alone PP TA pols. Employer payments to fund this still remain eligible for tax relief.

Group death in service schemes - may choose to contribute to separate insured DIS scheme to provide defined level of death bens.

Death in retirement - virtually all can provide bens to members nominated bens. Decision to provide this may be deferred if drawdown pen or phased retirement.

Question 16

Bens on leaving a transfer - early leaver occ schemes -

Refund of conts - when entitle to short service refund and applies date
Preserved ben - when entitled to short service ben and how may expenses change (if scheme is what + 2)

Transfer value - min amount of service, what must be offered, need to provide what to trustees and therefore give up what, in addition to what and what must trustees be satisfied with. TV is what in an insured scheme and how are these charges avoided

Answer 16

Refund of conts - Only entitled to short service refund if leave scheme with less than 30 days qual service. Only applies when membership after 10/15.

Preserved ben - fund built up is left there. 30 days or more they become entitled to this (SSB). If scheme insured, expenses may change;

• can be explicit e.g. special charge for paid up members that reflects absence of ongoing conts.
• it may be implicit and this is mainly in older policies

Transfer value - with at least three months service can get transfer value. Preserved bens must be offered. When transferring, need to provide discharge to the trustees of old occ scheme;

• formally gives up right to the old benefit in exchange for transfer value
• in addition to any statutory discharges
• trustees must be satisfied that receiving scheme is HMRC registered.

Amount of transfer is value of fund - any disinvestment charges. In an insured scheme, TV is surrender value. Surrender charges can be avoided if policy itself can be assigned to member or their new scheme.

Question 17

Bens of leaving or transfer

Transfer issues - what did review conclude on advice (3), FCA published what and advisers should take into account (7, think work)

Answer 17

Reviews concluded that firms were giving unsuitable advice on grounds -switch involved extra product costs
- funds recommended not suitable for ATR
- switch involved loss of bens without good reason.
FCA published template to help advisers reach correct conclusion for transferring pension scheme.

Adviser should take into account;

• charges on both schemes
• past performance
• analysis of with-profits fund
• transfer pens or market adjustment factors
• GARs
• proposed investments and if they are available in new scheme
• any life cover or bens that will be lost with transfer

Question 18

Stakeholder Pensions - what it is

Min conts - how must accept contributions, can only refuse when and transfer accepting

Charge - charge pre 04/05 and post. Additional charges…

Investment options - what must be offered (2), choice of funds and with-profits

Relationship with regs - TPR, FCA and HMRC

Answer 18

Low cost personal pension subject to min standards.

Min conts - must accept all contributions above min £20, any frequency and no restriction on way they are paid. Only refused are cash, credit card or debit card. Must accept all transfers and cannot charge.

Charge - depends on when they joined - ore 04/05 - 1% AMC post 04/05 1.5% reducing to 1% after ten years. Additional charges may be levied but offered as option and not compulsory.

Investment options - default investment choice must be offered and may be only choice or may offer choice of funds. Can be offered with-profits and must be offered lifestyle choice.

Regs - TPR - must be registered with

• FCA regs marketing of schemes and supervises firms responsible for managing funds
• HMRC - must be approved for conditions for tax approval.