Disclosing charges, costs and investments to DC members
The Department for Work and Pensions (DWP) published a consultation and draft regulations on the disclosure of charges and transaction costs to members of defined contribution (DC) trust-based pension schemes. The consultation also includes its response and further consultation on its 2015 consultation on investment disclosure. Accompanying draft regulations are due to come into force from 6 April 2018.
The thrust of these new rules is to help savers inform themselves about their pension savings in two areas:
- transparency and disclosure of the cost and charges they are paying, and
- where their money is invested.
By enforcing the publication of this information it is hoped that pension schemes will make it much easier for members to assess the value for money offered by their pension investment and to compare it with similar schemes and products.
The new requirements will apply to all DC trust based schemes and DC sections of otherwise defined benefit (DB) schemes. The rules will not apply to AVC only sections of DB schemes and some small schemes that are not subject to the chair’s statement requirements.
Definition of costs and charges
The consultation defines transaction costs as the costs and charges incurred when buying, selling, lending or borrowing investments. Charges, broadly, are all costs and charges borne by members other than transaction costs.
Flow of information
Under the new rules, asset managers will be required to provide this information to scheme trustees when requested. In turn, the disclosure requirements will be amended to ensure this information is being made available to scheme members by the trustees. This places a duty on scheme trustees to obtain the relevant information and to then publish it as required under the new rules.
Trustees have historically found it difficult to obtain information on costs and charges from asset managers. However, as covered in October’s Compass, the FCA has introduced new rules, effective 3 January 2018, that require FCA regulated firms that manage pension scheme money to disclose charges and transaction costs to trustees using a standard approach. Trustees have to request this information, asset managers will not provide it automatically.
The proposed new trustee disclosures
The current requirements to include default fund costs are to be extended to include the costs and charges for each default fund and each alternative fund that members can select. The Chair’s statement should also show this additional information.
Further, trustees will be required to publish this information on a website set up by them. The DWP has suggested that it does not have a suitable home to house this data. It expects the industry to create comparison sites that members can access.
Hard copy information must be made available if requested.
The current suggestion is that the information required for the Chair’s statement be the minimum that must be published on a website. On this basis, trustees should not be subject to any additional costs to make these numbers available. Initially the timescales (seven months from scheme year-end) will be applied to this requirement while the new requirements bed in; the proposed new regulations being effective from 6 April 2018.
Trustees will also be required to provide information in a ‘contextualised’ manner. The intention is that costs and charges should be explained and examples of the effect of compounding and the ultimate effect on retirement benefits be provided in a pounds and pence format.
Penalties for non-compliance
The intention is that the current penalty notice for failure to comply would be used. This would mean the Regulator could impose fines of £5,000 to individual trustees and £50,000 to trustee companies.
Investment disclosure consultation
Part 2 of the consultation looks at investment disclosure and in particular the possibility of greater disclosure of the underlying investments under pooled funds for DC schemes. This has been included with the costs and charges issue as the DWP is keen to make sure the two issues fit together. Further consultation is expected on its proposals.
The draft regulations form part of the consultation and it seems likely that they will be introduced as they stand or with a minimum of amendment from 6 April 2018. In practice, the timescales will provide trustees with at least seven months to report in line with the new requirements. This means trustee boards need to be thinking about how they will deal with these new disclosures.
Please speak to your usual Capita contact for more information.
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