DC pension trustees' use of alternative funds may be breaching pension law - TPR

The Pensions Regulator (TPR) has urged defined contribution (DC) pension trustees to monitor investments in alternative funds during Covid-19, as they may be unintentionally breaching pension legislation.

The regulator warned that members’ investments in self-selected funds that are temporarily closed during the ongoing market volatility and have therefore been redirected to alternative funds, may become default arrangements for the purposes of legislation.

Contributions that come in during the crisis cannot be invested in funds that have been 'gated' and trustees have needed to invest them in an alternative fund.

DC scheme trustees may then be breaching pension law if they do not subject these investments to the rules surrounding default funds.

Default arrangements are subject to a charge cap, if the scheme is used for auto-enrolment, and need to have a separate Statement of Investment Principles.

TPR said that the only ways in which a default arrangement would not be created in the redirection of member funds would be if the members were made aware that funds could be moved before they selected the original fund or if trustees subsequently obtained consent from members before diverting contributions.

The regulator urged scheme trustees to review the DC code of practice and said that they may need legal advice to check whether their scheme was affected.

Trustees that have unintentionally created a default arrangement have been told to take immediate steps to ensure they meet legal requirements.

TPR, however, issued some reassurance, saying that it would continue to take a “pragmatic approach” in deciding on whether to take enforcement action.

Despite this, it warned that it “no discretion” in using its powers regarding chair’s statements and will continue to impose fines for non-compliance.

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