The Department for Work and Pensions (DWP) and the Financial Conduct Authority (FCA) each launched consultations at the end of May 2016 to introduce a cap on early exit charges imposed by providers of money purchase pension arrangements. The capping proposals are intended to ensure that defined contribution (DC) pension savers do not face obstacles when seeking to transfer benefits for the purpose of accessing the new flexible benefit options introduced at 6 April 2015.
The proposed new requirements are broadly as follows:
- The provisions will apply to members with flexible benefits (broadly, money purchase or cash balance benefits);
- The cap will apply in respect of an ‘early exit charge’ i.e. a charge imposed
where the member opts to leave before their retirement date; and
- The proposed level of the cap is 1 percent for existing pension arrangements, and 0 percent - effectively, a ban - for any new pension arrangements entered into after the new provisions come into effect. The percentage rate is applied to the value of the member’s benefit at the point of exit.
In occupational pension schemes, the obligation to comply with the cap will rest either on the scheme’s trustees / managers or on service providers, depending on whether the cap derives from the scheme’s rules or from contractual arrangements entered into with third parties.
The DWP paper also raises the issue of what it terms the ‘water-bed effect’, that is, the concern that other charges or fees may be increased in consequence of the cap and warns that trustees / managers must be vigilant to ensure that excessive charges are genuinely capped, rather than simply displaced.
The DWP aims to implement the exit caps in 2017, once the relevant primary and secondary regulatory changes have been made.
The DWP consultation paper can be found here and the FCA consultation paper can be found here.
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