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Extensive new disclosure requirements for trustees of defined contribution occupational pension schemes

The Department for Work and Pensions (DWP) remains committed to the concept of transparency of pension costs and making sure that members, and employers, receive value for money for their pension savings. This is of huge importance for defined contribution (DC) schemes where every penny counts.

The DWP published its response paper to the consultation on the draft Occupational Pension Scheme (Administration and Disclosure (Amendment) Regulations 2018 in February. These Regulations were then finalised and became law on 6 April 2018.

The regulations apply to all sizes of DC occupational schemes, with very few carve-outs. The DWP’s approach is that, if these new governance requirements are unattractive then the government have also made it easier for DC schemes to be transferred into a master trust, and this is what trustees should consider doing.

The requirements do not apply to schemes that only provide DC applied voluntary contribution (AVC).

The majority of the changes to the Disclosure Regulations apply within seven months of the first scheme year ending, on or after 6 April 2018. So, there is time for schemes to work out how best to comply with these new requirements. The new disclosures are for scheme members and recognised trade unions.

DWP Policy

It's important that pension members are getting good value for their money, and that they have visibility of the costs and charges incurred by their pension schemes. Members also have the right to know how their savings are being invested, where it is proportionate for trustees and managers to inform them. The new Regulations build on the existing disclosure system, which already requires trustees of occupational schemes to request a report on the level of charges and transaction costs, and provide this through the Chair’s Statement which is to be made available to members upon request.

The Financial Conduct Authority (FCA) has also made new rules that applied from 3 January 2018. These require investment managers and insurers to provide information about transaction costs and charges, in response to a request from a relevant pension scheme. These new rules allow trustees to obtain the information they need to be able to provide the disclosures of the transaction costs that scheme members incur.

Key information and comment on the new requirements

Extent of investment disclosure

Required pooled investment information must now be available for all members to request from April 2019. The information must be provided within two months of the request. The burden on schemes is limited, as a member cannot make more than one request in a six month period.

The information provided must not be older than six-months at the point of the request, and it must reflect the investment options in which the member is invested at the time of the request, rather than historical information from the previous scheme years.

In practice, schemes may need to update the information at least twice a year to meet the above requirements. The consultation revealed that the DWP thought this should not add a significant burden to schemes, while the information will be a lot more useful to members.

White labelling of funds can continue, but schemes must disclose the current or recent underlying funds, which make up the white label on request.

Charges to be disclosed

Due to the changes in the investments, and the different times the members would have started making contributions, the exact level of charges will be different from member to member. While the DWP comments that it does not want schemes to mislead members, it also recognises that it would not be practical to indicate to each member the precise charges borne by that individual.

However, with charges and transaction costs comprising numerous underlying costs (which vary over the course of a year), members will bear slightly different costs based on:

  • The point in the year at which they began to invest in a fund
  • The day on which the members’ contributions were invested
  • Their portfolios rebalanced
  • The profile of their holdings over the year.

Therefore, it may be difficult to know exactly what date or timeline to use for determining what charges to disclose.

Schemes are required to include a link to costs and changes information on the annual benefit statement, rather than necessarily including this information on the annual benefit statement itself. Alternatively, the information could be provided by way of an insert, which forms part of the annual benefit statement. Master trusts that have a range of charges, depending on the size of employer that is using their services, still has to publish the full range of their charges but they can anonymise these. Overall, this is likely to reduce the charges which master trusts impose, as it will enable employers to see the range of charges which each master trust imposes. This is also likely to help employers negotiate charges downwards.

However, this requirement does not come into effect until the scheme is also required to publish the new costs and charges information, i.e. within seven months of the first scheme year ending on or after 6 April 2018. So, it is not likely to be a requirement for the first tranche of this year’s benefit statements.

Information about the scheme’s costs and charges does not have to be provided to members when they first join the scheme, but schemes can do so anyway by referring members to the relevant part of the Chair’s Statement.

Penalties

The DWP clarifies that the Pensions Regulator (TPR) has discretion not to levy a fine in relation to a breach of the Disclosure Regulations. However, a fine must be levied where trustees have not prepared the Chair’s statement at all. The DWP notes that the FCA has power to take action against investment managers who do not disclose their charges without good reason. Trustees should notify the FCA and TPR explaining the barriers they have faced with trying to comply with this legislation if they are having difficulty obtaining the information from their investment managers. It is also worth noting that the requirements in these regulations are minimums – schemes can disclose more information if they wish.

Archiving information

Schemes should use the average of the last five years to calculate historic transaction costs. However, this starts from April 2018, so there is no requirement to create past historic transactions costs. Costs and charge information should be published in such a format that it can be stored offline or printed, and the information should be accessible to disabled members of the scheme.

Chair’s statement

The Chair’s statement still has to be provided within seven months of the end of each scheme year. However, the information that must be provided in the Chair’s statement has been expanded to include:

  • The level of all charges and transaction costs for each default arrangement, and not a range – this is on the basis that if a scheme can carry out due diligence to select and offer a fund, it also has a duty to carry out the government to report on the level of costs and charges which members who select the funds will face
  • The level of charges and transaction costs for each fund which the members can select, and not a range
  • An illustrative example of the cumulative effect of the charges on the value of a member’s accrued right to money purchase benefits over time. This should be in “pounds and pence.” The DWP have produced a draft statutory guide for consultation about this which should be presented, especially as regards the compounding.

Trustees have flexibility of how to present this information but the DWP comments that graphical representations may be useful to help illustrate the effect of charges. The trustees should give regard to the guidance on publishing and the production of the new illustration.

The following information in the Chair’s statement will need to be published free of charge on the website:

  • The default strategy
  • The levels of charges and transaction costs paid by members for each default arrangement and fund which members can select
  • A statement on what transaction costs details are currently unavailable and the steps being taken to obtain the information in the future or how otherwise this will be addressed
  • An illustration of the compounding effect of costs and charges.

The information should be freely accessible to anyone who wants to search for it on an internet search engine – it should not be password protected.

The member’s annual benefit statement must inform the member that the above information is available and where to find it.

Investment reporting for pooled funds

The requirements have been expanded so that schemes that have pooled funds must give members further information, such as the fund’s top holdings, how investment funds are selected, and how the managers engage with the companies in which they invest.

The statement must identify name of each collective investment scheme, and the international securities identification number (ISIN) for each collective investment scheme, in which assets are invested if via a unit-linked contract.

Next steps

Schemes should review their reporting and information gathering processes to ensure compliance by April 2019.

Published: April 2018


Pensions Law Update - April 2018

Key Contact

Penny Cogher