The Pensions Regulator (TPR) has warned trustees of defined contribution schemes to check they are not “unintentionally breaching” pension legislation when moving member contributions to alternative funds.
In an update to its Covid-19 guidance, published today (May 21), TPR warned alternative funds could become default arrangements and would therefore be subject to pensions legislation, such as a charge cap and the need for a separate Statement for Investment Principles.
The issue affects DC schemes with members who have self-selected investments in funds, such as property, that have been temporarily closed until the market normalises following market volatility caused by Covid-19.
Contributions that come in during this period cannot be invested in these funds and so trustees invest them in alternative funds.
TPR stated: "Trustees should review the DC code of practice, which explains where a fund will be a default arrangement. They may need legal advice to check if their scheme is affected.
"If they’ve unintentionally created a default arrangement [they] should take immediate steps to ensure they meet legal requirements."
According to the regulator, the only circumstances where an alternative fund does not become a default arrangement are if members were made aware before they selected the original fund that contributions could be diverted to another fund in certain situations, or if the trustee contacted the members before diverting contributions and obtained their consent.
The regulator has reassured trustees it will continue to take a pragmatic approach, based on individual scheme circumstances, in deciding whether to take enforcement action.
But it warned it has no discretion in using its powers regarding chair’s statements and will continue to impose fines for non-compliance.
Last week (May 13), TPR updated its guidance to urge trustees to prioritise pension switches and ensure they are completed in "good time" so savers do not miss out during the Covid-19 pandemic.
It said switches between defined contribution schemes are a “core financial transaction” and a common way for savers to access their pension funds so should continue to remain a priority throughout the coronavirus crisis.
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