6. Defined Contrtibution Schemes

Question 1

What is a Retirement Annuity Contract (RAC) ?

Answer 1

Can’t have taken these out since 1988 but some would offer a guaranteed annuity rate on retirement and could have different benefits on death depending on type, often the guaranteed annuity rate is high

Question 2

What is an Executive Pension Plan (EPP) ?

Answer 2

Not many these days but usually for 1 man schemes for higher ups who could get better benefits separate from main occupational scheme

Question 3

Who are SSAS’s intended for and how many members can be in them?

Answer 3

designed for up to 12 members who are usually senior execs/ directors who also all have to be trustees

Question 4

What is a Targeted money purchase scheme ?

Answer 4

hybrid schemes w elements of DC & DB, usually set up as target level of benefits (e.g 10% of salary per year as long as certain salary assumptions met) as being the pension) Contribution rate is calculated by an actuary and is reviewed regularly

Question 5

Who decides on the eligibility requirements for group personal and stakeholder plans ?

Answer 5

The employer

Question 6

What is an in specie contribution?

Answer 6

In specie contributions are in effect the member selling an asset (e.g shares) to the scheme who buy it for a monetary value

Question 7

What is a Statutory money purchase illustrations (SMPIs) and how often do illustrations have to be sent out?

Answer 7

Illustrations which need to be sent out annually showing the projection of future pension that might be available in real terms with inflation considered , also takes in to account contributions & charges

Question 8

Which schemes don’t need to issue SMPIs?

Answer 8

don’t do this for retirement annuities or SSAS where all are trustees

Question 9

Which illustrations will the Pensions Dashboard be using when it comes in to place?

Answer 9

will use illustrations for estimated retirement income using assumptions in Technical Memorandum (TM1) provided by Financial reporting Council

Question 10

Name 2 assumptions which are included in the TM1 projections used in illustrations

Answer 10

• Projection is converted in to today’s terms assuming yearly 2.5% inflation
• Needs to take in to account future charges & expenses
• Accumulation rate depends on fund’s volatility (volatility group 1 = 2% & volatility group 2 = 7%pa)

Question 11

What is a simpler annual statement?

Answer 11

Since October 2022 trustees/ managers of DC schemes need to provide simpler annual statements, should be a 5 section document which breaks down: how much is in pension, how much can expect to receive in retirement, what can be done to give more money in retirement

Question 12

How often are simpler annual statments reviewed?

Answer 12

Every 5 years

Question 13

What is the difference between a trust based scheme and a contract based scheme?

Answer 13

Trust based schemes will be occupational DC schemes, whereas contract based schemes will be via group personal plans or stakeholder pensions

Question 14

What is the difference in management between a trust based scheme and a contract based scheme?

Answer 14

Trust and contract-based schemes differ in that trust based schemes is employer sponsored and governed by trust deed + trustees, contract based scheme is outsourced to 3rd party who manage it all

Question 15

Are DB schemes always trust based or contract based schemes?

Answer 15

DB schemes are always trust based schemes

Question 16

What are some of the benefits of trust based and contract based schemes?

Answer 16

Trust based – contributions taken from gross pay so full tax relief received immediately, better protection with trustee experts selecting funds
Contract based – less costly and less time consuming for an employer, but employees will have to claim back additional/ higher contributions through self assessment

Question 17

What are master trusts?

Answer 17

occupational pensions schemes which provide DC benefits and have more than 2+ employees,

Question 18

What is a benefit and a drawback of using a master trust?

Answer 18

Benefits – Members get ongoing oversight & management of investments, cheaper for employers
Drawbacks - Issues over conflicts of interests with trustee boards

Question 19

What are someof the 5 authorisation criteria master trusts need to meet to comply with TPR’s authorisation rules?

Answer 19

the trustees being fit & proper, having sufficient systems & processes as well as having a continuity strategy

Question 20

What is the voluntary assurance framework issued by TPR?

Answer 20

TPR have a voluntary assurance framework which it expects master trusts to have completed, there is a publicly available list of employers who have completed this but it isn’t mandatory

Question 21

Which regulator oversees trust based schemes and which oversees contract based schemes?

Answer 21

TPR oversees trust-based schemes and FCA oversees contract based schemes, TPR sets out duties and requirements of trustees/ managers of DC schemes

Question 22

Which governance standards do Trustees/ managers have to demonstrate they have complied with in the annual chair’s statement?

Answer 22

• Explaining how they meet requirements to have knowledge/ experience to run the scheme
• Consider whether costs/ charge offer good value
• Have a default arrangement in place

Question 23

What are charge controls and what are the max cap charges?

Answer 23

charge controls limit how much can be charged - and trustees need to make sure that when a member is in a default arrangement they’re not subject to charges above a cap (can’t charge over 0.75% if charges are calculated in % terms, or no charges below £100 pot if in monetary funds)

Question 24

What are some of the additional governance standards relevant multi employer schemes and master trusts are subject to?

Answer 24

• Need at least 5 trustees
• Majority of these trustees can’t be affiliated with any co that provides advice, admin or investment services to another scheme – to avoid conflicts

Question 25

What is an Independent Governance Committees (IGC) and which types of schemes are they designed for?

Answer 25

For contract based workplace schemes - gov requires Independent Governance Committees (IGCs) to be in place – need to have at least 5 members majority independent, and do a similar job to trustees of occupational scheme

Question 26

Name 2 duties of ICGs

Answer 26

- Act in the interest of the members - Assess ongoing value for money with with scheme - Raise concerns with board and potentially FCA if not rectified - Publish annual report of findings

Question 27

What a smaller version of an ICG which smaller schemes can set up?

Answer 27

Smaller schemes can set up a Governance Advisory Arrangement (GAA) as an alternative to an IGC, costs less to operate but aim to ensure scheme is providing value for money

Question 28

What is a collective money purchases scheme?

Answer 28

DC schemes where all assets are pooled, rather than individual having their own pot

Question 29

What is the difference between SSAS's and SIPP's regarding how they are set up/ governed and which regulator regulates each type?

Answer 29

SSAS is governed by a trust, SIPP is set up under a contract - also regulated by different regulators as TPR regulates SSAS and FCA for SIPPs

Question 30

Can employers continue to work beyond the retirement age that has been set by the scheme?

Answer 30

YEs

Question 31

Is it mandatory for individual pewntion providers to inform members they ahve a right to look for other options on the open market, and what about for occuupational schemes?

Answer 31

FCA requires individual pension providers inform members they have a right to look for another option on the open market, this isn’t mandatory for occupational schemes but is good practice as considered by Association British Insurers (ABI)

Question 32

What types of insurance could help someone with their pension contributions if someone is seriously ill/ incapacitated?

Answer 32

Personal Contribution Insurance (PCI) – Allows for pension contributions to continue to be paid if can’t work through incapacity, begins after a deferral period usually 26 weeks

Question 33

What is Waiver of Contribution insurance?

Answer 33

Personal pension plans set up pre 2001 may be covered by waiver of contribution if incapacitated – During claim period no further contributions required but will have to pay them on retirement/ death

Question 34

When can a member receive a short service refund if they leave their employer?

Answer 34

Can get refund of contributions if have less than 30 days service

Question 35

What is a preserved benefit and who would be entitled to one?

Answer 35

The value of all contributions built up, all who have completed 30 days + of service entitled to preserved benefits within the scheme

Question 36

How much service is needed for someone to take a transfer value from one scheme to another?

Answer 36

3 months +

Question 37

If looking to take a transfer value what needs to be provided to the trustees of the old scheme and what charges will the transfer value be subject to?

Answer 37

member can take it to an individual scheme or a new employer scheme and needs to provide discharge to the trustees of old scheme, the amount of the value transferred will be minus the disinvestment charge

Question 38

What are stakeholder pensions?

Answer 38

are low cost personal pensions which are subject to minimum standards

Question 39

For stakeholder pensions, what are some minimum standard around minimum contributions?

Answer 39

Needs to accept contributions at any frequency and can’t restrict how the contributions are paid

Question 40

What are the charges for stakheolder pensions both pre and post April 2005?

Answer 40

Charges depend on when member joined, pre April 2005 max AMC 1%, post April 2005 max AMC 1.5% for 10 years then 1% - charges need to cover all usual operating costs

Question 41

What invsetment options must be offered for stakeholder pensions?

Answer 41

Must offer a default investment choice or a choice of funds & a lifestyle arrangement needs to be offered (shifting portfolio towards lower risk areas as retirement approaches

Question 42

Who are stakeholder pensions registered with?

Answer 42

TPR

Question 43

What type of pension scheme, set up under an individual trust, has the ability to lend up to 50% of the scheme's net assets to the sponsoring employer? a. Self-invested personal pension. b. Small self-administered scheme. c. Retirement annuity contract. d. Section 32 policy

Answer 43

b. Small self-administered scheme.

Question 44

Sarah, aged 38, joined her employer's occupational defined contribution scheme in March 2022 and left the scheme in May 2024. At that time her fund was valued at £28,000. What early leaver options must Sarah be offered? Question 2Select one: a. A transfer value only. Chapter reference 6D1 b. A preserved [paid up] fund, a transfer value and a refund of member contributions. c. A preserved [paid up] fund and a transfer value only. d. A preserved [paid up] fund only.

Answer 44

c. A preserved [paid up] fund and a transfer value only. Chapter reference 6D1

Question 45

Which of the following types of defined contribution scheme would be classed as occupational schemes? a. Group personal pension plan. b. Executive pension plan. c. Retirement annuity contract. d. Small self-administered scheme (SSAS). e. A contract-based self-investment personal pension (SIPP).

Answer 45

B, D

Question 46

Which of the following statements relating to a targeted money purchase scheme are true? a. The minimum pension the scheme will provide members with is a proportion of final salary at or close to retirement or, if greater, the benefits that can provided by the defined contribution fund. b. The contribution that is paid into the scheme will be the estimated cost of providing the target level of benefit. c. The contribution rate for each member will be regularly reviewed. d. If a member’s fund at retirement is not large enough to provide the targeted benefits the employer must top up the member’s fund. e. If the employer becomes insolvent the trustees would have no claim against the employer’s assets, unless scheme contributions were in arrears. f. Early leavers from the scheme will be entitled to a preserved benefit, the defined contribution assets or a cash equivalent transfer value based on the targeted level of benefits, whichever is the greater.

Answer 46

B,C,E

Question 47

Which of the following statements relating to a statutory money purchase illustration issued on or after 6 April 2024 for a regular premium contract are TRUE? a. The accumulation rate is determined according to the fund's volatility group. b. Inflation is allowed for at a rate of 2.5% p.a. c. The pension figure illustrated always assumes that the annuity purchased increases each year in line with inflation. d. The pension figure illustrated must always include a 50% spouse’s pension. e. It must be assumed that no lump sum is to be paid at retirement date.

Answer 47

A,B, E

Question 48

Which of the following statements relating to Jennifer’s stakeholder pension plan, which she set up in 2010, are true? a. The minimum permitted contributions to the stakeholder pension plan must be no higher than £20 per month. b. Jennifer can choose to pay any stakeholder pension contributions by cash. c. The maximum annual charge levied by the stakeholder pension plan must be no more than 1.5% p.a. for the first ten years and a maximum 1% p.a. thereafter. d. Jennifer must be offered the option of a lifestyle fund as the default investment choice.

Answer 48

C,D