Trustees of most occupational pension schemes providing money purchase benefits (Defined contribution (DC) schemes) already assess charges and costs and prepare annual governance statements (the Chair's Statement).
From April 2018 information on costs and charges has to be presented to scheme members in a specified way, for example, using illustrations showing how costs and charges affect pot sizes and made available on publically accessible websites in accordance with new Department for Work and Pensions (DWP) Guidance and signposted via the annual member benefit statement.
Additionally, from April 2019, trustees will also have to disclose information on the top level of funds in which their members are directly invested. This isn't the focus of this update and we will be providing a separate update on it in due course.
Trustees should start to prepare for the increased disclosure requirements.
Key action points to note about the new disclosure requirements for schemes with money purchase benefits
1. Chair's statements, websites
The Chair's statement will need to be more informative regarding costs and transaction charges. This information will also have to be made publically available on a website to which members are signposted in their annual benefit statements.
2. Timeline - when does this come into force?
The costs and charges information must be published within seven months of the first scheme year end-date on or after 6 April 2018. So schemes with scheme years starting on 6 April 2018 have until 6 November 2019 to publish the information, but those with scheme years starting on 7 April 2018 (i.e. with scheme year ending on 6 April 2018) only have until 5 November 2018.
3. Does this apply to all schemes?
No, but most DC occupational pension schemes and the DC elements of mixed schemes are in scope. The proposals do not extend to "pure" defined benefit (DB) occupational schemes. DB schemes providing only AVCs are also exempt as well as "executive schemes" and public service pension schemes.
4. Statutory Guidance
Trustees must comply with the guidance and provide the required information to members in accordance with it.
5. Requests for information
Trustees should request the information they need to be able to make the required disclosures from their asset managers and providers well in advance of the statutory deadlines for publishing the information.
Costs and charges
Trustees of most occupational pension schemes providing money purchase benefits (DC occupational schemes) already have to assess charges and, so far as they are able, transaction costs borne by members and report on these via the annual governance statement (the Chair's Statement).
In relation to costs and charges, currently the Chair's Statement is only required to include:
- the level of charges and transaction costs applicable to the default fund (or where this is more than one, the range of charges and transaction costs);
- the range of charges and transaction costs for actively selected funds;
- transaction costs "in so far as trustees are able to do so" though when presenting details of the level of charges and transaction costs, the trustees must indicate any information about transaction costs which they are unable to obtain and explain what steps are being taken to obtain that information in the future; and
- a statement on whether the charges and transaction costs represent good value for money.
"Charges" for this purpose means, broadly speaking, administrative charges (with trustees already expected to combine information on charges received from investment managers with other scheme running costs borne by members, such as governance, administration, legal fees and payments for consultants). "Charges" do not include "transaction costs" nor specified other costs (such as complying with court orders, pension sharing costs or winding up costs).
"Transaction costs" are costs incurred as a result of the buying, selling, lending or borrowing of investments.
(There is other information that trustees must include, such as whether there has been an investment review in accordance with other regulations, but these are not changing).
The Department for Work and Pensions (DWP) consulted last year on proposals that the Chair's Statement provides more information about costs and charges and that trustees make that information available to members in a more meaningful way, for example, by providing an illustration of the cumulative effect over time of the charges and costs on the member's pot and sharing the information on a publically accessible website brought to the member's attention. The DWP also asked how information on the funds in which members' pots are invested could be more accessible and transparent.
The DWP's response was published in February, with the new regime finalised and statutory guidance issued.
What new information on costs and charges must be provided?
Trustees will have to identify the level of charges and transaction costs applicable to each default arrangement (not just the range). This also applies to each alternative fund option the member can select.
Trustees will also have to provide an illustrative example of the cumulative effect over time of the application of the costs and charges on the value of the member's pot. In preparing this, they must have regard to Statutory Guidance issued by the DWP.
The Guidance does not seek to be wholly exhaustive and allows schemes a degree of flexibility based on the characteristics and diversity of members, fund offerings and scheme resources.
Trustees should present the costs and charges typically paid by a member as a "£ and pence figure" in order to provide a realistic and representative range of combinations of pot size, contribution rates, real terms investment returns and rates of charges and costs.
It is not necessary to do this for every combination on offer within the Scheme and the DWP recognises it will not be practicable to allocate costs to individual members to provide personalised illustrations. But depending on the options offered by the Scheme, several illustrations might well need to be prepared. And, while schemes will have some flexibility in the preparation of the illustration(s), again, depending on their fund offerings, resources and membership, trustees should ensure any illustration is as meaningful as possible for their members.
When presenting data, schemes should also consider the needs and preferences of their membership but are free to use a variety of different approaches which they believe to be more suitable for particular groups of members.
The "£ and pence illustration"
The Statutory Guidance contains an example illustration of the type trustees should provide. There are several elements to consider when preparing the appropriate illustration for a member's pension pot, in particular:
- Pot size - while it will be acceptable to use a typical pot size, for example the median pot size, the pot size assumption should be clearly stated.
- Further Contributions - there should be at least one illustration including future contributions if the scheme levies a charge of any kind on contributions (and if using further contributions, the illustration should assume a contribution level broadly representative of the scheme). Where it is both disproportionately burdensome to show the effect of future contributions and the scheme does not levy a charge of any kind on contributions, the illustration may assume that no further contributions to the scheme will be made.
- Real terms investment return gross of charges - unrealistic expected rates of return should not be presented. Where trustees use a range of funds with different assumed levels of growth, the illustration should show a representative range of returns which include the highest, lowest and the most popular returns (by member not assets). Where a wide range of returns is offered by the scheme's funds, and an illustration for all would be confusing for members, trustees can select a range.
- Adjustment for the effect of costs and charges - this should include all costs, charges expenses and deductions (including transaction costs) which will have been taken from a member's pot. Where the scheme offers funds set at a range of different charges trustees should use a representative range, including the highest and lowest. Where most members are invested in a small number of funds, those levels should also be included, though it is not necessary to include every fund offered by the scheme.
- Time - the illustration should show the cumulative effect of the costs and charges over time, reflecting the approximate duration that the youngest member has saving until the schemes' normal pension age. Additional starting points should be seriously considered if costs and charges vary significantly by age.
- Optional elements - extra information can be added and data presented in a more disaggregated format (though this does not remove the requirement to display it in an aggregated form).
Preparation of the illustration could well be time consuming so, trustees should be proactively engaging with their asset managers to garner the necessary information. Trustee will need to consider the following in deciding how they want to approach the new requirements:
- How many illustrations best reflect scheme choices, options, rates of return and underlying assumptions?
- How easy will it be to obtain the information necessary to prepare the illustration?
- How difficult will it be to determine the median pot size or likely amount of future contributions?
- What is the most representative range of charges and costs?
- In relation to transaction costs, have trustees requested that their asset managers disclose information on charges and transaction costs?
It's clear that the DWP expects trustees to help members draw meaningful comparisons and derive information on the costs and charges they are paying and also enable cross scheme comparisons to be made too. If this isn't the outcome of the changes, the Statutory Guidance could well change following a future review as to fitness for purpose.
Where should the enhanced information be provided?
The new information must be presented alongside the information already provided in the "costs and charges" and the "value for member" sections of the Chair's Statement. But in addition to requiring more information to be contained in the Chair's Statement, the DWP believes that that information should be proactively "pushed" (as the DWP put it) to members.
So each member who receives an Annual Benefit Statement must also be provided with a web address where members can find the costs and charges information for their scheme (along with the other information already contained in the Chair's statement such as the default strategy, the value for money statement and a statement on any unavailable transaction costs and what steps are being taken to obtain details). In short, this means that relevant extracts from the Chair's statement need to be published on the web (or the entire statement could be published if the trustees so wish).
The Statutory Guidance specifies that the web address should be appropriately titled so that members can readily re-type it onto a web browser and its location clearly sign-posted. The policy intention is that the information is publically available and accessible for anyone who wants to search for it using an internet search engine. Unlike some disclosure requirements, there is no requirement to notify members that a website is being used for the first time where relevant signposting is included in the annual benefit statement.
The DWP acknowledged in the consultation that not all schemes have websites and may not wish to create one but considered a low burden solution for such schemes could be to use the employer's website or to utilise cloud services or online tools, with documents uploaded or even a service provider's website. Whichever is used, Trustees must have regard to the Statutory Guidance which refers to accepted web accessibility standards. These include, for example, that content must be downloadable, capable of being indexed by search engines and not require passwords or personal information to be provided in order to gain access. The trustees should also take into account the needs of disabled people in publishing the relevant sections of the Chair's statement (for example, whether screen reading software used by visually-impaired and blind people can read the content and in a logical sequence).
The information would only have to be given in hard printed copy format on request if it would be unreasonable for the individual requesting it to access the available information online (and where a person has a disability which means they are less able to access information on a website, this should be key factor in deciding to provide that information in a different format).
When must the information be provided?
The proposal is that the additional costs and charges information should be published as part of the Chair's Statement and must be produced within seven months of the scheme's first year end on or after 6 April 2018. Schemes could, if they have capacity to do so and believe it would be in their members' interests, publish the costs and charges information more frequently than annually.
The scheme's year end is therefore critical. The first schemes obliged to comply are those with a scheme year running from 7 April 2017 to 6 April 2018 (being schemes with their scheme year ending on 6 April 2018, the first possible date which triggers compliance). These schemes will need to be compliant by 6 November 2018.
The last schemes obliged to comply are those with a scheme year running from 6 April 2017 to 5 April 2018 (their first year end after 6 April 2018 being 5 April 2019). These schemes will need to be compliant by 5 November 2019.
Why should the information be provided?
Apart from reputational damage, financial penalties for non-compliance will be incurred. Penalties for failure to comply with obligations relating to the Chair's Statement are up to £5,000 for individuals and £50,000 for an organisation. The same penalties apply to failures to comply with obligations regarding publication of information on costs and charges.
Preparing for the new disclosures - get your house in order
For the costs and charges disclosures, gathering the required information for default and actively selected funds, preparing the Chair's Statements (particularly in relation to the £ and pence illustrations) and making information available on a suitable website in accordance with the Guidance is likely to take time and energy.
Additionally, there are likely to be changes to templates for annual benefit statements, to direct members to the website where they can find information on costs and charges and also in relation to advising members they can request top level information about the funds in which they are invested.
They key for trustees will be opening a dialogue with their investment advisers and asset managers in good time so they can meet the statutory deadlines we have outlined above. However, it is not just about compliance. The aim of the new requirements is to better equip members in their defined contribution journey. Engaging members in their pensions saving is by no means an easy feat. Whether or not providing additional costs and charges information will help with this remains to be seen. Making the information as meaningful and as possible and more accessible will hopefully be another step in the right direction.