R04 Legal bases of DC schemes: free practice questions

1. Question 1 of 5

   What is the main difference between a trust-based and a contract-based DC scheme?

   Option A: Only contract-based schemes can be used by employers for auto-enrolmentOption B: Contract-based schemes can't accept employer contributionsOption C: Trust-based schemes have trustees; contract-based ones are run by a providerOption D: Trust-based schemes give members guaranteed benefits that contract-based ones can't

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   The answer is C: Trust-based schemes have trustees; contract-based ones are run by a provider

   A trust-based scheme has a board of trustees; a contract-based scheme is outsourced to a provider such as an insurer. Benefits are broadly similar.

   Why the other options are wrong

   A

   Both can be used for auto-enrolment.

   B

   Both accept employer contributions.

   D

   Neither guarantees DC benefits.

2. Question 2 of 5

   Which of these are potential drawbacks of a master trust for an employer? 1. Little or no trustee representation 2. Possible conflicts where the insurer appoints trustees 3. Limited choice of default fund and providers 4. Higher costs than running its own trust

   Option A: 1, 2 and 3 onlyOption B: 1 and 3 onlyOption C: 1, 2, 3 and 4Option D: 2, 3 and 4 only

   Show answer

   The answer is A: 1, 2 and 3 only

   Employers can become disengaged, insurer-linked boards raise conflict questions, and choices are set at master level. Master trusts are usually cheaper than a single-employer trust.

   Why the other options are wrong

   B

   Conflicts of interest are also a drawback.

   C

   Statement 4 is wrong.

   D

   Master trusts are usually cheaper, not dearer.

3. Question 3 of 5

   From 2030, what scale must a master trust's main default arrangement reach to stay qualifying?

   Option A: £10 billion of assetsOption B: £25 billion of assetsOption C: £50 billion of assetsOption D: £5 billion of assets

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   The answer is B: £25 billion of assets

   The 2026 Act requires a main default of at least £25bn from 2030, with a transition path for those over £10bn that can reach scale by 2035.

   Why the other options are wrong

   A

   £10bn is the transition pathway threshold.

   C

   £50bn isn't the level.

   D

   £5bn isn't the level.

4. Question 4 of 5

   Which cost does NOT count against the charge cap?

   Option A: Transaction costs of buying and selling investmentsOption B: Costs of member statementsOption C: Fees paid to the scheme's actuaries and legal advisersOption D: Investment management fees

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   The answer is A: Transaction costs of buying and selling investments

   Transaction costs fall outside the cap but must be disclosed. Management fees, communications and professional fees count against it.

   Why the other options are wrong

   B

   Communication costs count.

   C

   Professional fees count.

   D

   Management fees count.

5. Question 5 of 5

   What can an IGC do if it's unhappy with a provider's response on value for money?

   Option A: Fine the providerOption B: Close the scheme to new membersOption C: Move the members to a new providerOption D: Escalate to the FCA and make concerns public

   Show answer

   The answer is D: Escalate to the FCA and make concerns public

   IGCs raise concerns with the provider's board and, if unsatisfied, can escalate to the FCA, alert members and employers and go public.

   Why the other options are wrong

   A

   IGCs can't fine providers.

   B

   IGCs can't close schemes.

   C

   IGCs don't move members themselves.

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