DC schemes – DWP proposes hard disclosure of investment administration charges and transaction costs
The DWP is consulting on its policy and proposed regulations for how investment costs and charge information should be published and made available to members; and for members to be able to request the funds in which their money is invested.
Costs and charges
The first aspect of this consultation follows on from the recently introduced FCA requirement that firms managing money on behalf of DC workplace pension schemes must disclose administration charges and transaction costs to the governance bodies of those schemes using a standard approach (see Pensions Bulletin 2017/40). When these rules take effect from 3 January 2018 the Government is keen to ensure that, when trustees are making this information available to members of occupational pension schemes, it is presented meaningfully and via channels that meet members’ needs. The Government believes that this information will empower scheme members, resulting in a stronger sense of personal ownership, so they are better enabled and motivated to maximise their savings.
The detail of the Government’s proposals is as follows:
- Disclosure should be to members, beneficiaries and others including recognised trade unions, but only to occupational schemes that provide money purchase benefits. There will be exemptions along the lines of those applying to the DC Chair’s Statement and in particular the new requirement will not apply to schemes where the only money purchase benefits provided are AVCs
- Both the Chair’s Statement and published information should set out the levels of charges and transaction costs for each default arrangement and each alternative fund option which the member is able to select and in which funds are invested during the scheme year. The consultation notes that some pension schemes offer a large number of funds and therefore presentation of each individual fund’s costs and charges could potentially be burdensome. However, the Government believes that members should have accurate cost and charge information for any and all funds they are invested in
- Not to be prescriptive as to where costs and charges information is published as long as it is published on the internet for public consumption
- Trustees should also provide an illustration of the cumulative effect over time of the costs and charges affecting members’ pensions savings, following statutory guidance. This should be a “£ and pence” illustration for a realistic and representative range of combinations of pot size, contribution rates, real investment returns and time and rate of charges and costs. The draft statutory guidance published alongside the consultation includes a multi-row and multi-column table example and shows that the Government intends these illustrations to be reasonably in-depth and meaningful
- Trustees should, as a minimum, publish costs and charges on a similar annual cycle to the Chair’s Statement, which must be produced alongside the scheme’s annual reports and accounts
- The Chair’s Statement content relating to the default investment strategy and value for members should be published alongside the cost and charge information in order to provide appropriate contextualisation for the latter
- Each member who receives an annual benefit statement must also be provided at the same time with a web address where members can find the costs and charges for their scheme
Investment funds
The second part of the consultation is on investment disclosure. For this the Government proposes a duty on trustees to disclose on request to members and recognised trade unions:
- The name and identification number of each collective investment scheme in which that member is directly invested; and
- The name and identification number of each underlying authorised fund directly attributable to each unit-linked contract in relation to that member (where there are no underlying authorised funds no additional disclosure is planned)
The information must be prepared within 7 months of the scheme year end and must be disclosed within 2 months of such a request. In addition, each member who receives an annual benefit statement should also be notified that they can request this information.
Both sets of proposals in this consultation specifically concern occupational schemes which provide money purchase benefits. The FCA is expected to consult on corresponding rules for workplace personal pension schemes in 2018. There is also a hint that these proposals could be expanded beyond occupational money purchase schemes in the future and the forthcoming white paper on DB pension schemes may develop this further.
Draft regulations have also been published and the consultation ends on 7 December 2017. The intention is that the regulations will come into force on 6 April 2018 which means that occupational pension schemes will first be affected in respect of scheme year ends from this date.
Comment
The Government is hoping that explicit and scheme-specific information on charges and costs will eventually lead to better member outcomes – either by trustees driving down costs or from member pressure to provide better value for money. No-one will argue against the desired outcome, but whether this policy will achieve it is open to question. For example, will the average scheme member be able to make anything of this information? They cannot, for instance, easily compare the costs in their scheme to any other scheme. And for members of pension schemes linked to their employment, there is no real freedom of choice to move to another pension scheme.
Cap brings down charges in qualifying schemes
This is the key finding from a survey of pension charges undertaken for the DWP.
This 2016 survey follows on from the 2015 survey which was focussed on the year leading up to April 2015 when the charge cap was introduced. In this latest survey, based on data collected from 14 pension providers (including 8 of the top 10 by market share), 112 unbundled qualifying schemes and 125 non-qualifying schemes, the findings include the following:
- The charge cap had lowered charges in qualifying schemes to the level of the 0.75% cap or below – being 0.54%, 0.48% and 0.38% on average for members of qualifying contract-based schemes, master trusts and trust-based schemes respectively
- Non-qualifying schemes, whose charges are not subject to the cap and were already typically higher than it, had not generally brought down their charges – the rates were 0.86%, 0.65% and 0.70% on average for members of non-qualifying contract-based schemes, master trusts and trust-based schemes
Other findings include:
- That legacy charges that were banned under the charges measures had been eliminated from qualifying schemes by April 2016 and remained extremely rare among non-qualifying schemes; and
- There was virtually no improvement in providers’ abilities to report on transaction costs compared to 2015
The survey also notes that most providers acknowledged that the downward pressure on charges was part and parcel of the industry and current regulatory environment and so would be likely to continue to some degree.
Comment
We could see further change in this area when the DWP reports on its review of the charge cap – which is expected by the end of this year, along with the auto-enrolment review. We would not be at all surprised to see a recommendation for the lowering of the 0.75% cap, especially as 0.5% would appear to be quite feasible.
DWP moves to simplify the DC bulk transfer without consent law
The DWP has moved decisively to ease the bulk transfer without consent law for DC benefits and in so doing is removing a potential barrier to allowing scale to develop in the DC landscape.
The DWP’s proposals, in the form of a consultation paper and set of regulations, follow on from its call for evidence at the end of last year (see Pensions Bulletin 2016/51) on which it has now also responded.
Under the new regime, where the transfer relates to pure DC benefits, it will no longer be necessary to obtain a “broadly no less favourable” actuarial certificate and the transferring and receiving schemes no longer need to be related. Instead:
- Where the receiving scheme is authorised under the yet to be introduced master trust regime, the trustees’ fiduciary duty to act in the best interests of members should be enough protection for members so the transfer can proceed without any additional requirements
- Otherwise the trustees of the ceding scheme will need to obtain and consider the written advice of a suitably qualified professional, who the trustees have verified to be independent from the receiving scheme under consideration, before deciding whether or not to proceed
The DWP says that under the master trust route, it will consider the need to develop some further guidance for trustees on how to review the suitability of the receiving master trust to complete their fiduciary duty to members.
Where the transfer is not into an authorised master trust, the DWP says that trustees of the ceding scheme will need to review the receiving scheme, under their existing responsibilities in trust law, but now with the assistance of appropriate guidance from the Pensions Regulator or the DWP.
Where members are protected by the automatic enrolment default fund charge cap in the ceding scheme, the DWP proposes that the receiving scheme will be required to continue to apply the charge cap in respect of those members in the arrangement into which they are transferred. Finally, the DWP intends that any funds into which members protected by the cap are switched without making an active choice should continue to be subject to the cap.
The draft regulations set out the route that pure DC benefits can follow, which sidestep the actuarial certification and scheme relationship conditions, going on to outline what it takes to be a “suitably qualified professional” in the case of the non-authorised master trust route. They also ensure that any cap protection continues to apply.
Consultation closes on 30 November and the intention is that the new regime will be in force on 6 April 2018.
Comment
We are pleased to see that there has been acceptance that the current regime, built with only DB schemes in mind, is not fit for purpose for the transfer of DC benefits. The principles behind the new proposals look sensible and practical. However, the proposed regulations set out only the minimum that is likely to be necessary for the new regime for DC bulk transfers to operate smoothly. Snagging issues caused by pensions tax law have been acknowledged, passed to HMRC, but not addressed. The guidance to assist trustees is not fleshed out and will presumably be delivered at a later date, but hopefully before April next year.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
