The Pensions Regulator’s new DC Code of Practice, which comes into effect today, has been attacked for failing to address the issue of low earners not receiving tax relief if they are automatically enrolled into net pay schemes.
Former pension minister Ros Altmann and Royal London pensions development manager Jamie Clark have both registered concern that the new code does not highlight to trustees the factors they should take into account when deciding whether to select a relief at source scheme or a net pay scheme.
Relief at source schemes, typically offered by FCA-regulated entities, give workers a minimum of 20 per cent tax relief even if they are below the threshold for income tax. Net pay schemes – including many written under occupational rules – do not, meaning low earners could lose £125 a year because their trustees have not chosen a scheme that gives them tax relief. Critics say the fact this loss is many times greater than the amounts these savers are likely to lose through many of the factors that are highlighted makes a mockery of the code. The code makes no mention of the words ‘tax relief’.
TPR says the code sets out the standards that pension trustees need to meet to comply with legislation, and says issues relating to tax relief are flagged up elsewhere on its website.
Hymans Roberston says schemes that do not appoint advisers will struggle to meet the requirement in the code to achieve value for money.
Former pensions minister Ros Altmann says: “It is an outrage that the interests of the lowest earners have not been looked after prominently in the new DC code. They have a an entire section on administration and nothing on low earners.”
Royal London pensions development manager Jamie Clark says: “Given that nearly three quarters – 74 per cent – of employers with fewer than 30 staff have chosen a trust based scheme for auto enrolment, we welcome the publication of the updated DC Code of practice and in particular the importance it places on investment governance and administration.
“We remain concerned however that many employers are not demonstrating due diligence in their choice of auto enrolment scheme, leaving them open to complaints and possible litigation from their workers. Low paid workers, for example, may not enjoy the benefit of tax relief in some trust-based schemes. We believe that advisers can play a key role in assessing and reviewing the suitability of trust based auto enrolment schemes in line with the Regulator’s code of practice, giving employers peace of mind that they have made the right choice.”
A spokesman for TPR says: “The DC code is aimed at providing guidance on legal requirements related to legislation for trustees and administrators of schemes. We offer online guidance on tax relief which supports the code on communicating with members. Our list of schemes for employers is separated by tax relief arrangements and has guidance.”
Hymans Robertson partner Rona Train says: “At the moment, assessment of value for members will be mostly qualitative and it’s probably fair to say this won’t be perfect in its first year. One of the reasons is a lack of industry-wide data. How to achieve cross-industry benchmarking is something we’re looking at.
“The regulator has called on large schemes to use information sharing through their consultants and professional trustees as one way of assessing value.
“As part of good governance, we already actively review value on behalf of our clients on a regular basis. Our overall scale and our strong relationships with providers help to positively influence the outcomes. So we would naturally expect our client base to have more competitive fees than comparable schemes who don’t regularly test the market.
“Schemes that don’t have the same level of governance and adviser support and influence will inevitably struggle to achieve the same value for money on fees. Wider industry comparisons should emerge. These are critical if value is to be assessed effectively.”