The Pensions Regulator has updated its Covid-19 guidance for DC scheme managers to issue an important warning to trustees on when the temporary closure of investment funds might create a default arrangement.
The update addresses the fact that some members of DC schemes have self-selected investment in funds (property funds, for example) that have temporarily closed due to the current crisis. In light of this, some trustees have redirected scheme contributions into alternative funds until the market stabilises and the closed funds re-open.
The updated guidance warns that this redirection could lead to trustees “unintentionally breaching” pensions legislation, as the alternative funds may be deemed default arrangements and may therefore be subject to certain legal requirements.
The position will depend on how the members who selected their investment made their choice; that is, whether these members were aware and whether they agreed to their contributions being used in this way.
The Regulator has stated that the only circumstances in which a default arrangement would not be created are if either:
- members were made aware before they selected the original fund that contributions could be diverted to another fund in certain situations; and/or
- members were contacted before their contributions were diverted and their consent was obtained (although, in any event, the Regulator is urging trustees to take advice on the implications on the scheme before doing this).
The Regulator is encouraging trustees to review the DC Code of Practice, and to seek legal advice to check if their scheme is affected. If a default arrangement has already been unintentionally created, the Regulator is requiring that trustees take immediate steps to ensure that the legal requirements are met.
Our team is available to support on this - and we have set up our COVID-19 Helpline in response to these and other issues and concerns (https://www.burges-salmon.com/news-and-insight/press-releases/burges-salmon-pensions-practice-launches-covid19-helpline/).
Some trustees, having taken investment advice, are redirecting scheme contributions into alternative funds until the gated funds re-open. This could result in the alternative funds becoming default arrangements