|Disclosure of costs, charges
and investments in DC
The DWP have fulfilled on their promise to provide a disclosure framework for occupational DC pension schemes. From April 2019, anyone in a DC workplace pension will be able to know
How their money is being invested
How much the investment is costing.
What’s more, the information will not be the exclusive property of trustees and members, we’ll all be able to know, which means that we’ll be able to compare and contrast what our trustees are doing with the deal available from the trust around the corner.
The promise is that the FCA will follow in so that some time this decade we can reasonably hope to compare the deal from the insurance companies and SIPP providers with what we can get from the trustees of a DC scheme – master trust or otherwise.
This is absolutely essential if we are to have a free market in pensions , where individuals can take their pots to their one big pot and if employers are to be empowered to move workplace pension provider. The dashboard and the new regulations on DC to DC bulk transfers are part of this, but a proper system of value for money benchmarking is a pre-requisite for a properly functioning market.
There are two publications
An uncompromising document that drives forward the transparency agenda.
The DWP have produced one response to their consultation on disclosures. It is split into two parts,
- the disclosure of what investment management costs (the money)
- the disclosure of what you’re getting by way of management (the value)
inevitably , attention will focus on cost, if only because it has proved so difficult to nail so far.
This article looks at what I consider the main features of the disclosures and focusses on the reasoning from the DWP as to why it is sticking by its guns. The proposals as they stand are pretty much as proposed originally. A list of amendments is published at the bottom of this article.
What costs will Trustees need to publish?
The DWP are keen to point out the costs measured will be what is born by members from within the fund (e.g. what impacts the unit price), rather than what the trustees choose to pass on by way of other expenses (record keeping and member services). There is a further job of work to be done measuring the total cost of the pension management and the DWP’s work ducks the rather messy analysis of the cost of lifestyle transitioning. It rightly points out that Target Date Funds which transition within the fund will be at a disadvantage – I am sure that it will be possible to find a solution to this problem in time.
The DWP are not going to be prescriptive as to how the costs are shown and the paper rather cleverly shifts the obligation on the Trustee from prescription on what they have to do , to satisfying what the member ought to see.
As for data, the obligation is on asset manager not the trustee , the DWP “will not penalise trustees if they fail to report transaction cost information they do not have”
However, this is not a get out clause, the paper insists
“We believe that if a scheme can carry out the due diligence to select and offer a fund, they also have a duty to carry out the governance to report on the level of costs and charges which members who select the fund will face”. (para 36
There is nothing new in the proposals on the charges information that should be published.
What context should surround the publication of costs and charges?
The DWP are equally relaxed about the contextualising charges .
We believe this approach enables trustees and managers to be responsive to meet changing needs and the diverse requirements of different pension scheme memberships and we welcome innovation and development by trustees. We will keep this under review and consider whether any further mandating may be required in the future.
Thankfully the DWP are not falling into the trap of providing a “designated public body” for the publication of costs and charges will be published. Instead Trustees will have responsibility for publishing information digitally, either on their website or in a public (digital) place.
The obvious development , would be for information on trust based schemes to be available through the pensions dashboard, so that people looking to bring together the values of their pension schemes could make qualitative decisions about which to aggregate to.
A less obvious, but no less important development, could be the creation of tables allowing ordinary people to compare the performance , risk and costs of their fund with those of other schemes. There is no reason such contextualisation might not include group personal pensions and even non-workplace pensions (such as SIPPs).
Should there be an exemption for smaller schemes?
The DWP are taking a tough stance on smaller schemes. They will not be exempted from these disclosures and will have to comply with them in full. Special pleading has fallen on deaf ears.
We did not find these arguments persuasive. If members are required to enrol in smaller schemes in order to secure an employer contribution to their pension pot, there should be no reason why the persons governing the contributions on their behalf should be subject to less robust oversight. In practice, too, introduction of ‘carve-outs’ for smaller schemes actively discourages those schemes from merging as doing so would tend to be accompanied by increased governance burdens.
No exemptions for the technologically challenged.
The DWP are taking an uncompromising stance towards those who can’t or won’t get web-savvy
Each member who receives an annual benefit statement should be provided at the same time with a web address where members can find the costs and charges for their scheme.
there are no exemption
Tough penalties for non-compliance
We have recently seen the Pensions Regulator dishing out fines to the Chairs of Trustees not making sufficient effort with their Chair’s statements. The upshot of tPR’s comments is that where a Chair does not make a reasonable effort, he or she will be putting the trustees at risk. Since , in a DC context, the cost of meeting these fines can only be met by a sponsor or provider , the trustee’s personal pockets of Professional Indemnity insurance, these fines are very real.
Regulation 5 of the Disclosure Regulations sets out the penalty notices for failure to comply with any other requirement under those Regulations. The Regulator may impose a penalty, payable within 28 days, which must not exceed £5,000 for an individual, and £50,000 for an organisation.
The consultation also proposed that this existing penalty regime should apply to any failure to report or publish costs and charges information in accordance with the requirements imposed by these proposed amendments to the Regulations
Who should be driving the Lamborghini – you or your fund manager
The regulatory guidance that accompanies the DWP’s response to its consultation, is uncompromising and its intent explicit. Trustees will be given the freedom to present the impact of charges in any way that suits the member’s needs .
Perhaps trustees might consider presenting the impact of charges graphically showing how an expensive fund could generate sufficient costs to provide a fleet of Lamborghinis to the fund manager. Similarly, a well run fund with low costs could be measured in terms of what cost savings could buy the member. It would be surprising if a well run fund could not save a member the cost of a Lamborghini over a lifetimd.
Rumours of the harmful impact of benchmarking have been exaggerated.
As with exemptions, special pleading from the industry with regards benchmarking , has cut no ice with the DWP
We plan to continue with requirements to publish this information, as we still believe publication is an important step to help drive market behaviour in the long-term and a step in the right direction for transparency across the industry. Many other sectors have seen the emergence of price comparison tools, and judging by those sectors the potential harm appears to be overstated.
The DWP has taken the view that benchmarking is an opportunity for those trustees who have a good deal to show off and those who lag, to be publicly shamed. It is refreshing to see such opacity in Government policy making
Engagement means more than upping our input!
The second part of the DWP’s document deals with requests for information from members about the schemes they are in. As mentioned above, I don’t have space to go into the guidance on information in great detail. The full guidance can be found on this link.
The DWP have not been bamboozled by arguments that present member engagement purely in terms of increasing contributions. While it is in everyone’s interests to see more contributions, many mature savers find contributions the least important part of their saving.
Insistence on the benefits of more contributions shows an unhealthy appetite for “new business”, as the DWP puts it
There are other indicators of member engagement than increased contributions. Sometimes trustees will be asked to explain why their costs are higher than seemingly comparable offerings by other schemes, and what extra is delivered in return. Where these can be justified, trust is enhanced and higher contributions can follow. Where they cannot, trustees will need to work to improve member outcomes. We do not see either of these results as a bad thing.
As the DWP point out, “nudge-nomics” makes engagement with governance all the more important
When increasing proportions of assets in defined contribution schemes are a result of automatic enrolment and the member has not made any active choice of fund, it is even more important that trustees are accountable for their decisions, and make those decisions knowing that members have the right to examine them.
So what does all this information disclosure boil down to?
Well trustees will need to respond to people in a proper manner in a timely fashion
Consistent with the consultation, trustees and managers must still disclose this information in response to a member or recognised trade union request, within 2 months of the request
The information on funds will be onerous
Trustees have a duty to begin to disclose pooled fund information from 6 April 2019, and the information must be no more than 6 months out of date at any time.
Disclosure is based on the investment options in which the member is invested at the time of their request, rather than those in which they were historically invested over the previous scheme year.
But trustees only have to provide this information once in a six month period.
What has changed from the initial consultation?
Key changes – The key changes in the ‘Amendment Regulations’ are as follows:
|Description||Details||New or amended regulation|
|Coming into force – timing||All new charge and cost information will need to be provided by trustees or managers when their next scheme year ends on or after 6 April 2018. This is:
• The new information required for the Chair’s statement;
• The publication of certain information in the Chair’s statement on a website, free of charge; and
• Information to be included in the member’s annual benefit statement.
[Note: this will mean that the first information will need to be provided by schemes with a scheme year running from 7 April 2017 to 6 April 2018 – by 6 November 2018. The last scheme to be required to provide information will be schemes who have a scheme year that runs from 6 April 2018 to 5 April 2019 – by 5 November 2019.]
|Amendment Regulation 1(3)|
|Information in Chair’s statement||The following information requirement has changed, new details need to be provided on:
• The level of all default arrangements – the level of charges and transactions applicable to each default arrangement – not a range
|Administration Regulations – amended regulation 23(1)(c)(i)|
|• The levels of all funds – the levels of charges and transaction costs for each fund which the members can select – again not just a range.||Administration Regulations – amended regulation 23(1)(c)(ii)|
|• An illustrative example – a new illustrative example of the cumulative effect over time of the application of charges and transaction costs on the value of a member’s accrued rights to money purchase benefits.
[Note: the new provisions do not prescribe how this information should be presented. This decision is at the discretion of the trustees and managers of the scheme (although also see details on statutory guidance below). The policy intent is that it should be clear to readers how the trustees justify the transaction costs and charges incurred. Where they wish, trustees many include assessments against the investment performance of each scheme – although this is not a regulatory requirement at present.]
|Administration Regulations – new regulation 23(1)(ca)|