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R04 Chapter 5 > R04 Chapter 6 > Flashcards

R04 Chapter 6 Flashcards

1
Q

What are the main types of DC schemes?

A
  1. Personal and Stakeholder
  2. Group Personal and Stakeholder
  3. SIPP
  4. Retirement Annuity Contracts
  5. Occupational DC schemes
  6. Targeted Money Purchase Schemes
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2
Q

What is a Personal and Stakeholder pension?

A

PPP - individual DC arrangement. Contributions build in a fund - usually with profits or unit linked. It can be accessed by the member from normal retirement age (age 55 currently).
Stakheolder pension - low cost PP. Subject to certain minimum standards concerning charges, investment choice, minimum contributions etc.

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3
Q

What is a Group Personal and Stakeholder Pension?

A

Similar to an occupational scheme, but this is actually a series of individual DC arrangements. Within the grou plan each employee has their own arrangement.

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4
Q

What is a SIPP?

A

Self-invested personal pension - an individual DC arrangement - it is a PP with a much wider investment choice. SIPPs can invest directly in company shares or can be used to purchase commercial property.

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5
Q

What is a Retirement Annuity Contract?

A

An individual DC arrangement. Similar to a PP but benefits can be offered in 2 ways:
1. A guranteed annuity rate at retirement
2. Benefits payable on death but in some circumstances these are more restricitve: noreturn/return of contribution with no interest/return of contributions with interest
Guaranteed rate is often generous compared to the market but with certain restrictions.
No longer offered for new clients.

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6
Q

What is an Occupational DC scheme?

A

Set up by an employer on behalf of employees. They set the eligiblity requirements an the rules of the scheme which specify contribution levels. It has some variations:
1. Executive pension plan - one man scheme - aimed at directors and senior employees.
2. Small self-administered schemes - aimed at company directors and senior employees. Typically less than 12 members - all must be trustees.
3. Section 32 - prior to A-Day - designed to accept benefits transferred from an occupational scheme.

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7
Q

What is a Targeted Money Purchase scheme?

A

Hybrid - features of DB and DC are present - target level of benefit is determined usually in line with benefits provided by a DB scheme. Contribution rate for each member is regularly reviewed to keep funding of the scheme on course to provide intended level of benefit. At retirement, the member’s pot cn be topped up to ensure target is met: either via an unalocated amount held within the scheme for this purpose, or an additional special contribution by employer.

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8
Q

What are the differences between a targeted money purchase scheme and a DB occupational scheme?

A
  1. Employer hasn’t promised the target level of benefits - can avoid paying if the assumptions aren’t met.
  2. Only benefit that is promised is value of contribution assets.
  3. Early leavers from a targeted money purchase scheme are normally only entitled to a preserved benefit of the defined contribution assets.
  4. Employer may choose to disconnect from the funding target and treat the scheme as a normal DC.
  5. If employer becomes insolvent, trustees would have no claim against their assets, unless scheme contributions were in arrears.
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9
Q

What are the eligibility rules for a Group Personal and Stakeholder Pension?

A

Employer chooses eligiblity requirements e.g. employee is eligible after a certain period of employment or membership of the scheme is conditional on the level of employee contributions. Rules can be chosen to make the scheme qualifying for auto-enrolment rules.

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10
Q

What are the eligibility rules for an Occupational DC scheme?

A

Chosen by employer. Rules of the scheme also define eligibility when:
1. In some cases, not all members of the scheme are employees e.g. could be offered to self-employed contrators
2. SSAS are usually only offered to senior employees and directors so eligibility requirements are more restrictive.

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11
Q

Is there a limit on individual member contributions?

A

No limit on how much a member can contribute, but there is a limit on how much will receive tax relief. Contributions can be indexed so they automatically increase each year in line with RPI. Contributions into a scheme offered by an employer usually have a defined level of contribution which must be paid as a condition of eligibility.

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12
Q

What are the rules for employer contributions?

A

Employers will state the level of contribution they are prepared to make so the cost of its commitment to employees is known. A minimum level may be met so that the pension is qualifying for auto-enrolment.

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13
Q

What is an in-specie contribution?

A

Takes the form of an asset transfer. Certain conditions must be satisfied for tax-relief eligibility.
The Pensions Tax Manual (PTM) states that contribution by a member or employer must be a monetary amount. In specie transfers can satisfy this if:
1. There’s a clear obligation on the contributor to pay a contribution of a specified sum.
2. There’s a separate agreement between scheme trustees and contributor to sell an asset to the scheme for market consideration.
3. There’s a separate agreement under which the scheme trustees and the contributing party agree that the cash contribution debt may be offset against the consideration payable for the asset.

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14
Q

What is a Statutory Money Purchase Illustration (SMPI)?

A

An illustration must be sent to all members of most defined contribution schemes annually to show the amount of future pension that may become available under the scheme in ‘real terms’. Exceptions: RACs and SSASs where all members are trustees.

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15
Q

How is the projected benefit in an SMPI calculated?

A

Current accumulated fund at illustration date
PLUS
Accumulated future contributions (including tax relief where applicable)
MINUS
Accumulated charges or expenses
MINUS
Accumulated risk benefit costs

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16
Q

What are projection assumptions for SMPIs?

A
  1. Projections are based on an accumulation rate determined by the provider - take account of expected returns from current and anticipated investment strategy and must be based on expected returns before deduction of expenses
  2. Projection rate is convertaed into today’s terms assuming inflation 2.5%
  3. Effect of future contributions is taken into account
  4. Future changes and expenses must be taken into account
  5. Rate of interest used in calculating annuity rates must be determined each year on 15 February
  6. An assumtpion that PCLS will be paid can be included (PCLS will be in today’s terms)
  7. Spouse/civil partner inclusion is at provider’s discretion
  8. No allowance is made for mortality before retirement
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17
Q

What are the new requirements since Oct 2022 for annual benefit statements?

A
  1. Section 1: Member and
    pension scheme details
  2. Section 2: How much money
    you already have in your
    pension plan
  3. Section 3: How much money
    you could have when you
    retire
  4. Section 4: What you could do
    to give yourself more money
  5. Section 5: Find out more
    about your Pension Plan and
    how you can use your money
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18
Q

What is a trust-based scheme?

A

An employer sponsored pension scheme, governed by a trust deed and which has a board of trustees overseeing the scheme.
A DB scheme is always set up as a trust-based scheme.

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19
Q

What is a contract-based scheme?

A

Outsourced by an employer to a third party provider, which will manage all aspects of the scheme i.e. insurance company.

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20
Q

What are examples of a trust and contract based schemes?

A

An employer wishing to set up a defined contribution scheme for their workforce can choose
between a trust-based scheme (via an occupational defined contribution pension scheme),
or a contract-based scheme (via a group personal pension (GPP) or stakeholder pension
scheme).

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21
Q

What are the features of a trust-based scheme?

A
  1. Operates on a net pay method - contributions are deducted from their pay before tax is applied - full tax relief is received immediately.
  2. Offers members protection of the trustees and their expertise. This costs the employer, but it is beneficial.
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22
Q

What are the features of a contract-based scheme?

A
  1. Contributions are made from earnings once tax and NI have been applied. Treated as net, but are effectively grossed up by the insurance company. Higher or additional rate tax must be claimed by the member via self assessment.
  2. Less costly than trust-base but can be seen as a less viable benefit by employees.
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23
Q

What is a Master Trust?

A

An occupational pension scheme that:
1. Provides DC benefits
2. Is used or is intended to be used by 2 or more employers
3. Is not used, or is not intended to be used, only by employers that are connected with each other
4. Is not a public service pension scheme

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24
Q

What are the features of a master trust?

A
  1. Each employee has its own division within the arrangement
  2. There’s one legal trust and one trustee board - trustees retain independence on decision making for their division and decisions for benefits and contributions typically reside with the employer
  3. Greater simplicity and convenience offered to employers
  4. Costs associated with an employer running its own trust-based scheme are avoided
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25
Q

What are the benefits of a master trust?

A
  1. Offers governane function for employers with lower operating costs and simplicity and convenience
  2. Ongoing management and oversight of investments
  3. Only one group of advisers is needed for the whole scheme rather than each division
  4. One board of trustees for entire scheme
  5. Consolidated accounting and governane requirement
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26
Q

What are the drawbacks of a master trust?

A
  1. If trustees are appointed by the provider of the trust the employer may not have any representation so may become disengaged.
  2. Conflicts of interest if the trustee boards have representation from the insurance parents.
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27
Q

What are TPR’s requirements for master trusts?

A
  1. Fit and proper - honety, integrity, and knowledge
  2. Systems and processes - sufficient IT systems and processes for efficiency
  3. Continuity and strategy - credible strategy as to how members will be protected
  4. Scheme funder - a corporate body or partnership that only carry out activities related directly to the trust.
  5. Financial sustainability - enough financial support to ensure it can set up and operate on a daily basis and to cover costs subsequent to triggering evenets without increasing cost to members.
28
Q

What if the master trust is not suitable?

A

TPR can withdraw autorisation if they think the scheme no longer meets the authorisation criteria.

29
Q

What is a voluntary assurance framework?

A

Enables trustees of master trusts to demonstrate to employers that their scheme is managed to a high standard. It sets out how trustees should report against a series of ‘comtrol objectoves’ related to governance and administration and is aligned with TPRs DC quality criteria.

30
Q

Who is in charge of governance standards for DC schemes?

A

TPR oversees trust-based schemes and FCS which regulates contract-based schemes.
TPR sets out duties and requirements applicable to trustees and managers of occupational DC schemes and the DC element of hybrid schemes

31
Q

What are the governanve standards of occupational DC schemes?

A

Trustees and managers must:
1. Explain how they meet the requirement that they have, or have access to, sufficient
knowledge and understanding to effectively run the pension scheme.
2. Ensure the core scheme financial transactions are processed promptly and accurately.
3. Consider whether the costs and charges borne by members represent good value.
4. Meet governance requirements for the schemes default arrangements.

32
Q

What are charge controls?

A

Apply to default arrangements of occupational DC schemes being used as qualifying schemes. One member schemes are exempt. They limit charges and how they may be structured. Trustees must ensure that no member’s funds in a default arrangement are subject to charges in excess of a cap

33
Q

What are relevant multi-employer schemes?

A

Schemes in which some or all employers using the scheme are not connected to one another. Include master trust schemes. Must comply with additional governance:
1. At least 3 trustees. If there’s a corporate trustee that’s not a professional trustee body, there must be at least 3 directors.
2. Non-affiliated trustees to be apoointed in an open and transparent way.
3. Trustees must enourage members or their reprsentatives to make their opinions known.

34
Q

What are Independent Governance Committees?

A

Gov requires contract-based workplace pension schemes to have IGCs. These have aminimum of 5 members, majority which should be indpenedent. Concerned with default investment funds and charges incurred by members.

35
Q

What are the key duties of IGCs?

A
  1. Act solely in the interest of relevant scheme members
  2. Assess ongoing value for money
  3. Raise concerns with provider’s board if there’s problems
  4. Escalate concerns to the FCA where there’s dissatisfaction with action
  5. Publish an annual report of findings
36
Q

What are Governance Advisory Arrangements?

A

GAA - alternative to IGC for providers operating smaller and less complex schemes. May cost less to operate, but desired outcome is the same - to deliver good value for money for members.

37
Q

An IGC and a GAA is required if firms provide what function for customers with a contract based personal pension?

A

Non-advised drawdown.

38
Q

What do IGCs do?

A
  1. Consider whethere all communications to customers it is responsible for is fit for purpose
  2. Consider and report on adequacy and quality of their product provider’s policy on: ESG, non-financial matters, stewardship, how these are taken account of in their product provider’s investment strategy and investment decision making.
39
Q

What are Collective Money Purchase Schemes?

A

Also known as Collective DC schemes (CDC). An alternative to DB and DC. They are risk sharing plans.
Employer defines level of contributions paid into the plan. But assets are pooled between members, rather than each member having an actual pot of money earmarked for their benefits. Initial amount of pension is set at the level that is expected to be provided based on contributions payable by and made in respect of the member.

40
Q

Benefits of CDC?

A

In comparison to DC schemes they:
1. Offer cost certainty to employers
2. Better member outcomes - higher average pension income
3. Member’s have a better idea of their income in the run up to their retirement.

41
Q

What is a SSAS vs SIPP?

A

SSAS - occupational DC arrangement and thus governed by a trust.
SIPP - individual DC arrangement, and typically set up under contract.

42
Q

What are the features of a SSAS?

A
  1. Occupational DC scheme
  2. Governed by a trust deed and rules
  3. Regulated by TPR
  4. Scheme can lend up to 50% of net assets to sponsoring employer
  5. Investments are chosen by trustees and benefits aren’t earmarked for individual members
  6. Greater level of administration required
  7. Statutory Money Purchase Illustrations not required as long as all members are trustees
  8. Sponsoring employer/trustees can restrict eligibility
43
Q

What are the features of a SIPP?

A
  1. Individual DC scheme
  2. Usually set up as individual contract between the member and the pension provider
  3. Regulated by FCA
  4. If set up under contract, lending is not permitted as there’s no sponsoring employer
  5. Investments are chosen by the member with funds earmarked for their benefit
  6. Less administration required
  7. Statutory Money Purchase Illustrations will be issued at least annually
  8. Anyone can take out a SIPP
44
Q

Occupational Schemes vs Individual - Normal Pension Age differences

A

Occupational - scheme documentation set out the normal pension age - retirement can occur before, on or after the age. Employer cannot demand that benefits are taken at retirment age. Worker can continue working and employer has to contribute.

Individual - benefits cna be drawn once minimum pension age (55) is reached. Rules of the scheme determine how benefits can be taken.

45
Q

How can benefits be taken from a DC scheme?

A

Income or lump sum. No guarantees of the income or lum sum that can be provided - benefits depend on the size of built up fund.

46
Q

What is PCLS?

A

Pension Commencement Lump Sum. Usually available except when: there’s no scope in scheme rules for this, or member used up all of their PCLS allowance.

47
Q

What is UFPLS?

A

Uncrystallised Funds Pension Lump Sum. Accessing some or all of an uncrystallised DC fund without designating funds to a drawdown plan. Member doesn’t receive PCLS with an UFPLS - but typically 25% is tax free and remainded taxed based on income tax.

48
Q

How can income be taken from a DC scheme?

A
  1. Scheme pension - pension is directly paid out of the scheme assets or paid by an insurance company selected by the scheme administrator
  2. Lifetime Annuity - paid by insurance company the member has chosen
  3. Drawdown pension - member draws an income from the pension fund either directly (income withdrawal) or via a series of short term annuities
49
Q

What are open market options?

A

FCA requires providers of individual pension arrangements to ensure that members know of their right to opt for an open market option - e.g. buy a lifetime annuity from any authorised insurer.

50
Q

What is ill-health early retirement?

A

It is only possible to draw benefits before the normal minimum pension age (55) on the grounds of ill health. Certain conditions must be met. Schemes can have strict rules -e.g. any occuptation vs own occupation. Benefits can only be paid as income, income and PCLS, small pots payment, or UFPLS. In some circumstances a scheme cna suspend payment if the member regains their health.

51
Q

What is a serious ill health lump sum?

A

If the member has a life expectancy of less than one year - it’s possible to commute all their arrangements for a serious ill health lump sum - can only be paid from uncrystallised funds (or unused funds after 75). Crystallised funds cannot be taken as a serious ill health lump sum.

52
Q

What is pension contribution insurance?

A

Allows an individual’s and/or employer’s contributions to be paid if the individual is unable to work due to ill health or incapacity. Applies to personal or stakeholder pensions set up after 6 April 2001.
PCI premiums are paid into a separate insurance contract and aren’t eligible for tax relief. Most contracts limit the max contribution on a claim to £3,600 p.a. gross so the full amount is eliible for tax relief in the event of a claim. Payments usuall begin after a deferred period, usually 26 weeks.

53
Q

What is waiver of contribution insurance?

A

For PPPs established pre 6 April 2001, contributions in the event of incapacity may be covered by a contract of insuracne called waiver of contribution.
1. Contributions in respect of the waiver are paid directly into the personal pension
2. In the event of a claim, no further contributions will fall due during the aiver claim period.
The pension provider undertakes a commitment to pay the value of pension benefits on
retirement, transfer or death as if pension contributions had continued throughout the period
of the claim.

54
Q

What is income protection insurance/permanent health insurance?

A

An alternative to PCI and waiver of contribution.
Purchased by a company. The scheme pays an income to the employee in the event of their ill health of disability - counts as relevant UK earnings. Allows contributions above £3,600 to continue to be eligible for tax relief.
Purchased by an individual - Benefits in oayment don’t count as relevant UK earnings - contributions over £3,600 aren’t eligible for tax relief.

Allows the member to have an income while their pension scheme membership continues.

55
Q

What is Death in Service?

A

Represented by the uncrystallised funds in the member’s name at date of death. Can be used to provide income and/or lump sum benefits in additiona to any other life cover benefits.

56
Q

What is Personal Pension Term assurance?

A

From 6 April 2006 - you can contribute to a registered pension scheme in respect of life cover (known as pension term assurance). Premiums are usually much lower than for ordinary term assurance and tax relief isn’t given on personal contributions to stand-alone personal pension term assurance policies. Employer payments are eligible for tax relief.

57
Q
A
58
Q

What is a Group Death in Service scheme?

A

Employer can contribute to a separate insured death in service scheme to provide a defined and reasonable level of benefits to members. Can just provide a lump sum death benefit e.g. 2 times pensionable salary. Cost of providing any spouse’s or civila partner’s or survivor’s pension is expressed as a lump sum e.g. 10 times pensionable salary. Used to purchase a pension on member’s death before retirement.

59
Q

What are the options for early leavers of occupational schemes?

A
  1. Refund of employee contributons - called short service refund if they leave the scheme with less than 30 days qualifying service.
  2. Preserved benefit - the value of assets built up on behalf of the leaving meber by employee and er contributions. Members who completed 30 or more days of employment qualify (known as short service benefit).
  3. Transfer value - for employees with a t least 3 months’ service - can take a transfer value to another scheme. Transfers can be to stakeholder pensions because other schemes may not accept potentially small payments involved.
60
Q

What are flexible benefits?

A

DC benefits, cash balance benefits, and any benefit that is calculated by a reference to a fund. Any transfer between two DC schemes is a transfer of flexible benefits.

61
Q

What is a stakeholder pension?

A

Effectively a low cost personal pension. Personal and stakeholder pensions are identical in terms of contribution limits, benefit limits, and tax treatment. BUT stakeholder pensions are subject certain minimum standards.

62
Q

What are the minimum contributions in a stakeholder pension?

A
  1. Contributions must be accepted at any frequency
  2. Minimum permitted contribution rate cannot be higher than £20
  3. No restrictions on how contributions are paid - e.g. cheque, standing order, DD, and direct credit must all be accepted. It can only refuse cash, credit card, or debit card.
  4. Must accept transfer payments from another pension source
  5. Can’t impose any additional charges on transfers in and out of the scheme
63
Q

What are the restrictions on charges in a stakeholder pension?

A

Max Annual charge depends on the date of joining:
1. Before 6 April 2005 - Max charge is 1% of fund value
2. New members after 5 April 2005 - Ann charge can’t be any more than 1.5% p.a.a for the first 10 years and must be reduced to 1% after

If an employer is using a stakeholder pension to meet their automatic enrolment duties, the charge cap is reduced to 0.75% p.a.

64
Q

What are the restrictions on investments in a stakeholder pension?

A

Default investment choice must be offered. With-profits funds are allowed, but the fund can’t contain non-stakeholder assets.

New customers must be offered a lifestyle arrangement.

65
Q

What are the regulatory obligations of stekholder pensions?

A
  1. Scheme must be registered with TPR - they maintain a directory of all stakeholder schemes and regulates compliance and regitration requirements
  2. FCA - regulates scheme marketing and advice proviion and supervise fimrs responsible for managing the funds invested
  3. HMRC - must approve to ensure that the scheme meets the conditions necessary for tax approval
66
Q
A

R04 Chapter 5 (6 decks)

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