Defined Contribution (DC) Pensions

• Topic 01

  Defined Contribution (DC) Pensions

  34 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. A part-time employee works for two employers simultaneously. With employer A they earn £8,000; with employer B they earn £7,500. Neither employer knows about the other job. What are the AE obligations of each employer?

   • A
     The employee must notify HMRC who will then aggregate the salaries and instruct both employers to enrol the employee
   • B
     Each employer must auto-enrol the employee as a precaution because the combined salary likely exceeds the trigger
   • C
     Each employer assesses AE obligations independently; neither salary meets the £10,000 earnings trigger, so the employee is a non-eligible jobholder with each employer; earnings are not aggregated across employers for AE purposes
     Correct answer
   • D
     The employers must coordinate and aggregate the salaries to determine AE eligibility; combined earnings of £15,500 trigger auto-enrolment
   Explanation

   AE eligibility is assessed by each employer independently based on the earnings paid by that employer. Salaries from different employers are not aggregated. With employer A (£8,000) and employer B (£7,500), the employee earns above the lower qualifying earnings threshold (£6,240) but below the £10,000 trigger with each employer, making them a non-eligible jobholder with each. They can opt in to either or both schemes, and each employer must contribute if they do.

2. What is the earnings trigger for automatic enrolment for 2024/25?

   • A
     £10,000 per year
     Correct answer
   • B
     £15,000 per year
   • C
     £6,240 per year
   • D
     £8,000 per year
   Explanation

   The earnings trigger for automatic enrolment in 2024/25 is £10,000 per year. Employees aged between 22 and State Pension age who earn above this threshold are eligible jobholders and must be automatically enrolled. The trigger is set by the annual Automatic Enrolment (Earnings Trigger and Qualifying Earnings Band) Order.

3. What is the charge cap that applies to default funds in auto-enrolment qualifying DC schemes?

   • A
     0.75% per annum of fund value
     Correct answer
   • B
     2% per annum of fund value for the first five years
   • C
     1% per annum of fund value
   • D
     0.5% per annum of fund value
   Explanation

   Under the Occupational Pension Schemes (Charges and Governance) Regulations 2015, the charge cap for default funds in auto-enrolment qualifying DC schemes is 0.75% per annum of the fund value. This cap covers most member-borne charges (excluding transaction costs, which must be separately disclosed). Performance fees are not permitted within the capped default fund. The cap was introduced to protect auto-enrolled members from high charges that would erode their retirement savings.