Frequently asked questions About PQM Standards
1.What are the core standards?
Schemes are assessed in 3 core ares:
2.Which standards apply if my company is using a PQM READY scheme?
Your scheme will only need to comply with the contributions standard, as it will automatically meet the standards on governance and communications.
3.What is the difference between PQM and PQM PLUS?
The only difference is in contribution levels.
For PQM the contributions need to be at least 10%, with at least 6% from the employer. For PQM PLUS the contributions need to be at least 15%, with at least 10% from the employer.
4. Do the Required contribution levels reflect the diverse DC pension arrangements offered by employers?
Yes. The PQM reflects the variation in the design of DC pension schemes and takes into account the following: fixed contributions, matching contributions, age and service-related schemes, job and category-related and non-contributory schemes, and salary sacrifice.
5.What if my scheme has matching contributions?
What we mean by matching contributions is that there is more than one level of contributions available and the employees can choose which level they are going to be contributing at. The employer then matches their contributions.
In case of matching contributions we are looking for at least one of the levels to meet the PQM or PQM PLUS headline standard (10% or 15% total contributions). It means not all levels have to meet the standards. This level has to be available to all scheme members and has to be clearly communicated.
6.What if my scheme has age-related contributions?
In order to meet the PQM standards, actual average or notional average contributions have to meet either PQM or PQM PLUS headline standard (10% or 15% total contributions).
Actual average contributions are average contributions of the current scheme membership.
Notional average contributions are contributions of a notional (imaginary) scheme member who joins the scheme aged 22 and leaves the scheme aged 65.
If there is a matching element in your contribution structure, this should be taken into account as follows:
- Actual average - the average contributions if all actual employees selected the highest available option within their age bracket
- Notional average - the average contributions if the notional scheme member selected the highest available option throughout his/ her scheme membership
7.What if my scheme has service-related contributions or there is a nursery scheme for auto-enrolment?
Auto-enrolment rules allow a three month waiting period before employees have to join a scheme. This makes sense to employers in some sectors, so we have built this into the PQM rules.
However, a waiting period can be no longer than three months. Where schemes have service related contributions, average contributions must meet the headline contribution standard. Applicants can exclude the first three months of employment from the calculation. We expect employers to make clear in communications if some employees will not be eligible for PQM-level contributions. Finally, the employer contribution must be greater or of the same value to any employee contribution.
Where employers have a nursery scheme, where contributions are different to the main scheme, then the average contributions across both schemes must meet the headline contribution standard. As with schemes with service related contributions, the first three months of employment can be excluded from the calculation.
8.What if my scheme is non-contributory?
Where the employer contributes 10% or 15%, it immediately meets the PQM or the PQM PLUS headline contribution standard.
Where the employer contributes at least 6%, it will meet the PQM headline contribution standard if at least 50% of scheme members contribute enough in Additional Voluntary Contributions (AVCs) to make up the total of 10%.
Where the employer contributes at least 10%, it immediately meets the PQM. It potentially meets the PQM PLUS if at least 50% of scheme members contribute enough in AVCs to make up the total of 15%.
Where there are matching contributions available should the scheme member choose to contribute, the contribution structure is treated as 'matching contributions', not non-contributory, for the PQM purposes.
9.Why do you have a standard on pensionable pay?
To make sure that the standards on contributions are meaningful, we need a standard on the amount of pay that is pensionable. Otherwise schemes could get PQM with seemingly high contribution levels, but where contributions are only paid on a small proportion of pay so are actually quite low. To keep things simple we have mirrored the 'certification' rules used by the DWP to assess whether a scheme qualifies for automatic enrolment.
10.What if my scheme is trust-based?
You already have governance in place, which is great. But where you are running a defined benefit (DB) section under the same trust as the defined contribution (DC) section you have to ensure that DC gets enough time at the trustee board meetings. We would expect for DC issues to be a standing agenda item.
Trustees also need to receive regular training - in a way of training courses or updates from consultants - so they can make informed decisions on behalf of the members.
11.What if my scheme is contract-based?
For contract-based schemes (group personal pensions, stakeholder pensions, group SIPPs and any other schemes not under a trust) there has to be governance in one of these two forms:
- Governance/ management committee
- Annual scheme review
We would expect larger schemes to have a governance or management committee in place which meets at least twice a year. At least one scheme membership representative has to be on the committee. Such a member can be employer- or member-nominated. All committee members need to receive regular training - in a way of training courses or updates from consultants - so they can make informed decisions on behalf of the members.
Annual scheme review form is more suited to small schemes. It has to be conducted by a person with sufficient knowledge of pensions. Scheme member views also have to be taken into account. Schemes often choose to collect these via surveys or during presentations.
12. If I was a member of a scheme that qualified for PQM or PQM Plus, what level of pension would I receive when I retired?
The PQM is designed to encourage saving at a level above the new minimum set out in the Government's pension reforms (8% of earnings within a limited band of pay), so that workers get closer to the kind of retirement incomes that they expect. In 2005, The Pensions Commission found that average earners should ideally aim for a retirement income of 60-67% of their working income, and set auto-enrolment (where employees are automatically enrolled into a pension scheme from 2012) at half the level of voluntary saving needed to get to that level.
We have projected earnings replacement rates in order to estimate what saving into different types of pension might achieve. For an average earner, state pensions and paying into Personal Accounts for 40 years will generate a retirement income of around 43% of their previous earnings. (For example, someone earning £26,000 today after 40 years could expect a pension income of around £11,000 a year - in today's prices and earnings.)
An average earner paying into a PQM pension (10% total contributions on basic pay) could expect a retirement income worth around 50% of their working income (around £13,000 in today's prices and earnings). For a PQM PLUS pension, an average worker could expect around 60% of their previous income (around £15,000 in today's prices and earnings).
13. Can the Pension Quality Mark guarantee a certain level of pension?
The PQM does not specifically relate to or guarantee the level of pension income an employee will receive at retirement. Rather, it seeks to identify good and very good provision.
Using some prudent assumptions, it is possible to estimate the levels of retirement income that might be provided by a PQM Pension (see answer above). However, as with all DC pension saving, it is impossible to be certain about pension levels as they depend on a range of changing factors including investment performance, inflation, annuity rates and longevity. That is why we have set out governance and communications standards that ensure the employer regularly reviews the scheme in light of changes, and that employees receive the information they need to keep engaged and make decisions.
14. What are the basic components of the governance standard?
Governance arrangements must be in place to ensure the scheme is well run and operates in the best interests of members. Provisions include:
A governance structure such as a trustee body, management committee or annual scheme review (in consultation with members).
Simple investment options must be available such as a default fund; or a limited choice of risk related funds; or a wider choice, but only if advice and guidance is available.
The average total charge, including all administration and fund management charges that are paid by scheme members (including both current and past employees) must not be more than a 1% Annual Management Charge.
15. Why have you not insisted that all contract-based schemes have management committees?
The PQM is aimed at companies both large and small and the latter may not have the resources available to run a permanent management committee. However, in applying for the PQM, the company will have to show that, as a minimum, an annual scheme review is adequately carried out.
16. Can you say how many funds you mean by 'limited range of funds'?
Broadly speaking, if there are 10 or less funds we will consider it to be a "limited range of funds". However, our decisions on whether it would be appropriate to give the PQM to a scheme are also related to the quality and clarity of the information and guidance provided. Therefore, a PQM may be given to a scheme with a single fund, a limited range of funds, or a wider range of funds.
17.What is the PQM charge cap and why was it introduced?
PQM has a charge cap to ensure that the scheme is good value for members. High charges can seriously erode the value of a pension pot over time. The cap usually only applies to charges on the scheme's default fund and can be no more than an annual charge of 0.75%.
18.What does PQM see as good communications?
The communications have to be clear and easy to understand. Any jargon should be eliminated where possible and, if it has to be used, it should be clearly explained. Communications should also be regular:
Scheme members should receive clear communications about the scheme, its contribution structure and investment options on joining the company/ when they become eligible to join the scheme/ when they join the scheme.
Scheme members should receive regular ongoing communications, reminding them to review where they are with their pensions savings and make changes where necessary.
Scheme members should receive clear at retirement communications, outlining all their options.
19.How will you monitor schemes' communications?
Schemes will have to provide examples of communication with members when they first apply for a PQM and will have to certify annually that they still meet the qualifying criteria. There will also be verification checks on a number of randomly selected schemes to ensure they are meeting the necessary criteria.
20.Our scheme does not meet all the standards. Can I still apply?
You can apply but it is very likely that your application will be rejected. If you think you don't qualify please contact us prior to making an application. We will be able to help you with some tips and easy steps on how you can achieve some of the standards.
21. I would like to understand how the standards apply to my scheme. Is there help available and does the consultation cost anything?
Yes, we will be able to help you to understand how the standards apply to your scheme or what steps you need to take for your scheme to meet the standards. This service is free of charge, all you have to do is to contact us and tell us more about your scheme.
28/11/2017 - Aon MasterTrust awarded PQM Ready read more
07/11/2017 - Aviva Master Trust awarded PQM Ready read more
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For those working in human resources, the PQM will play an important role in helping to promote their organisation?s reward package to both current and new staff.?
Charles Cotton - CIPD