Government to enforce pension member-borne commission ban from April


The government is to place a regulatory duty on pension service providers to prohibit member-borne commission charges for workplace pension schemes from April 2016.

In October 2015, the Department for Work and Pensions (DWP) launched a consultation into the most effective means of regulation to prevent members of pension schemes that provide money purchase benefits or that are used for automatic-enrolment from bearing the cost of commission paid to an adviser.

The consultation laid out two possible regulatory routes: placing a duty on pension trustees to ensure scheme members are not charged or placing the responsibility on service providers.

In its response to the consultation, the government confirmed that it is to place the duty on service providers for new commission arrangements, and variations or renewals of existing commission arrangements.

A regulatory duty will also be placed on pension trustees to inform their service provider if the pension scheme is being used as a qualifying scheme for auto-enrolment. Trustees will be obliged to provide this information either within three months of the regulations coming into effect, the date the pension scheme is used as a qualifying scheme for auto-enrolment or the date the service provider is appointed, whichever is the later.

In turn, service providers must comply with their regulatory duty within one month of receiving notice from pension trustees.

In addition, pension scheme members will be able to opt-in to advice and services, subject to certain conditions. These agreements must be set out in writing and include the cost of the service or advice provided, as well as the duration over which the payment will be taken.

The Pensions Regulator will enforce the ban on member-borne commission, subject to Parliamentary approval.

The regulatory duty on trustees and service providers will come into force in April 2016 with respect to new commission arrangements. The government will consult on regulations for existing commission arrangements later this year.

On 26 January 2016, the government opened a consultation on whether the draft regulations achieve the policy decisions laid out in its response to the 2015 consultation. The latest consultation will run until 9 February.

Andrew Warwick-Thompson, executive director for regulatory policy at the Pensions Regulator, said: “The ban on member-borne commissions is another important and welcome step towards ensuring pension savers get value for money.

“Assessing and securing value for money remains a key trustee responsibility for all pension schemes, and the ban will further support trustees in obtaining value for members of defined contribution (DC) schemes.

“We are committed to protecting benefits for the millions of people saving for their pensions, so we are pleased the draft regulations give us the ability to use our existing powers directly on providers. This is a new regulated community which may be subject to the use of our powers, and we will take this new role seriously.”

Simon Tyler, a pensions lawyer at law firm Pinsent Masons, added: “The DWP’s approach in allocating responsibility for removing commission arrangements should be commended. There had been a suggestion that trustees could bear this responsibility, but trustees will often not be aware of whether commission is being paid.

“It is therefore right that trustees should merely be under a duty to inform service providers that the scheme is a qualifying scheme used for auto-enrolment. It is then for service providers to remove the commission arrangements.”