6 - Defined Contribution Flashcards
What can a DC scheme may be?
Occupational scheme provided by an employer for benefits of the employees
Individual arrangements funded by the member
What is a personal and stakeholder pension
Individual defined contribution arranagements - cont build up in fund (With profits/unit linked).
What is a stakeholder pension
Low cost personal pension - subject to min standards
What is a group personal and stakeholder pension
A series of individual defined contribution arrangements
What is SIPP
Self-invested personal pension - individual defined contribution arrangement. With lots of choice.
What is a retirement annuity contract (RACs)
An individual defined contribution arranngement
Similar to personal pension plan, but no new ones since 01/07/1988
What is a executive pension plan
Set up as “one man” schemes aimed at director and senior employees.
What is a SSAS
Small self-administered scheme - aimed at company director and senior employees. Self- administered scheme has less 12 members (all trustees). Have special additional features for directors/senior employees and investment options.
What are targeted money purchase schemes?
Hybrid schemes with both features of DB and DC schemes
Target level of benefit is determined
What is some differences between targeted money purchase schemes and DB
Employer has not promised targeted level of benefits - so can avoid benefits if assumptions not met
Only benefit promised is value of DC assets
Early levers of targeted money scheme only entitled to benefits from DC
What is in-specie contributions
Form of assets (e.g. shares to a pension)
Where are the tax rules set out in, in-specie contributions?
Pensions Tax manual
What must the contribution be in, in-specie contribution
What rules must be satisfied?
Monetary amount
- Clear obligation on the contributing party
- Separate agreement between scheme trustees and contributing party to sell an asset to scheme for market consdieration
- Separate agreement under scheme trustees and contributing party agree cash contribution debt may be offset against consideration payable for asset
What must be done if MV of asset is < contribution debt (in specie contribution)
balance must be paid in cash to qualify for tax relief
How often must illustrations be sent to members of most DC schemes
Annually
What should Statutory money purchase illustrations include
Current accumulated fund at illustration debt
Accumulated future contributions
Accumulated charges
Accumulated risk benefit cost
Who provides basis for SMPI illustrations
Financial Reporting Council
What are some assumptions used for SMPI
Projections based on accumulation rate determined by provider
Projection converted into today term assuming inflation 2.5%
Future cont - 2.5%
Charges taken into account
When is the rate of interest for annuity calculated for SMPI
15 feb
Where can individuals view information about pensions inc state pensions online
Pension dashboard
What do the new simpler annual statements include
5
Member and pension scheme details
How much money in pension plan
How much money you could have when you retire
What you could do to yourself more money
Find out about pension plan and how can you use money
5
How often should simpler annual statements be reviewed
after 5 years and at least every 5 years after that
What is a trust-based scheme
Employer sponsered pension scheme, governed by trust deed and has board of trustees that oversees scheme
What is contract-based scheme?
Outsourced by employer to third party provider which manages all aspect of scheme
What is Defined benefit scheme set up as? Trust based or contract-based?
Trust based
How can DC schemes be set up
Trust-based scheme : Occupational defined contribution pension scheme
Contract-based scheme (via group personal pension/stakeholder pension scheme)
What are some differences between trust-based scheme and contract-based scheme
Trust-based:
Net-pay arrangement
Protection of trustees in selecting funds
Contract-based:
Contributions after tax
Less costly for employer
What is TPR definition of a master trust scheme
Occupational pension scheme that
- Provides DC benefits
- Used by 2 or more employers
- Not used only by employers that are connected with each other
- Not a public service pension scheme
What are some benefits/ drawbacks of Master trust schemes
Benefits:
Offers a governance function for employers with lower cost and simple
Members benefit from oversighht of investment
Only one group of professional advisors rather than a group for each division
One boad of trustees for whole scheme
Drawbacks:
If trustees are appointed by provider of master trust, employer unlikely to have trustee representation - disengaged from pension arrangements
Many trustee boards established by insurance companies have representation of insurer parent - conflict of interest
How many criteria does master trust have from TPR and what are they
5
Fit and Proper
System and processes
Continuity and strategy
Scheme funder
Financial sustainability
What framework insures tht mastertrusts demonstarte to employers scheme is maintained to high standard
Voluntary assurance framework
What is the limit of charges for members funds in occupational DC schemes
0.75%
What is the minimum pot size for charges for a flat fee to be charged on a occupation DC scheme
£100
What are some charges relating to the cap on occupation DC scheme
IM fees
Ongoing cost (it and office)
cost of statements
payment to lawyers
What are relevant multi-employer schemes
Those in which some or all of employers using scheme are not connected to each other
What are some additional governance standards that relevant multi-employer schemes/master trust must follow
At leat three trustees/ three directors that are not affilated with any company that provides services to scheme
non-affiliated trustees must be appointed in open and transparent fashion
Trustees must have process in place to encourage scheme members to make their views known on matters that affect them
What do the government require contract-based workplace pension schemes to have?
Hint committee
Indepedendent Governance Committees (IGC)
What must IGC have?
Independent Governance committees must have
- Min 5 members
- Majority independent (applies to any workplace schemes/ not just automatic enrolment)
What are the duties of IGC
4
- Act solely in interest of relevant scheme members
- Assess ongoing value for money of workplace personal pension schemes
- Escalate concernss to FCA if dissatistfed with actions taken
- publish annual report of findings
What can providers who hae smaller and less complex pension schemes can establish
Governance Advisory Arrangement
Who are the GAA and what do they do
Third party like IGC but cost less to operate, with the aim to ensure that relevant schemes deliver money to members.
What type of drawdown must have IGC or GAA
non-advised (SIPP or other Personal pension policy) - contract-based personal pension agreement
What are collective money purchase schemes?
Risk sharing/target pension plans.
Like DC pensions but assets are pooled between members rather than each member having money earmarked for their benefits
What advantage can collective money pension schemes have compared to DC schemes
Advantages to cost for employers
Offer members better income
Provide members better idea of income
What are some differences between SIPP and SSAS
7 (what type of scheme, regulated by etc.
SSAS:
Occupational Defined contribution scheme
Governed by trust deed and rules
Regulated by The Pension Regulator
Scheme can lend up to 50% of net to sponsoring employer
Investments chosen by trustees and benefits are not earmarked for individual members
Greater levels of admin
No need SMPI as all members are trustees
SIPP:
Individual defined contribution scheme
Set up as individual contract between member and pension provider
Regulated by FCA
Can not lend as no sponsoring employer
Investment chosen by individual and earmarked for individual basis
Less admin
Need SMPI annually
When are some conditions a PCLS cannot be taken out
No scope in scheme rules for lump sum to be taken out
Member used up all PCLS allowance
What are the methods to draw income out of pension
Scheme pension: pension paid directly out scheme assets/ paid by an insurance company by scheme admin
Lifetime annuity: paid by an insurance company member chose
Drawdown pension : member draws income from pension fund direcly
What are the only methods to draw income under Ill health
Income
Income + PCLS
Small pots payment
UFPLS
What is PCI
Pension contribution insurance - allows indiv/er contribution to continue due to ill health
What type of pension schemes can PCI be used in
personal/stakeholder pension
What is the general deferred period of PCI
who is responsible
26 WEEKS, individual/er is responsible for maintaining cont in meantime
What is the limit to PCI generally
3600 gross
Are PCI premiums elgible for tax relief
NO
What is Income protection Insurance
AKA: Permanent health insurance
- Purchased by company: pays income to employee due to ill heealth and counts towrads releavant UK earnings - allowing more than 3600 gross for tax relief
- Purchased by individual - does not count as releavnt uk earnings, so no more than 3600 gross for tax relief
What are the options for when indivduals leave occupational DC pension schemes
Early leaver
Refund of EE cont (if leavie with less than 30 days of service)
Preserved benefit
Transfer Value: - transfering to another pension (at least 3 months)
How long do members have of a occupational defined contribution scheme have the right to transfer pension
Up to date of crystallisation of benefits even if they have reached scheme normal pension age
What should an adviser take into account when determining whether a transfer is appropriate for client
Charges
Past performance
Analysis of existing with-profit funds
Transfer penalties
Guaranteed annuity rates
Life cover?
What is the template that advisors must follow for DC -> personal pension or SIPP
Question: 4 sections
1. Infomation gathered about firm,client and pension arrangements
2. Customer needs analysis, objectivesm consolidation of pension
3. Unsuitable outcomes? if client has been switched to anything that is not good for them
4. Can identify where advice is suitable - advisor
Data:
1. Record information about ceding scheme
2. Section to record information relating to scheme
3. Section on fund specific data for receiving scheme
What are the min standards of stakeholder pensions
Accept contributions at any frequency
Not set min permitted contribution at rate higher than £20
No place restrictions in which cont is piad
Accept transfer payments from another pension source
Not impose additional charges on transfers in/out scheme
What are max charges of stakeholder scheme
Before 06/04/05 - 1% of fund
After 06/04/05 - 1.5% pa for first 10 years then 1%
What is the charge for stakeholder pension to meet automatic enrolment
0.75%
