Pensions: new requirements to disclose DC charges and transaction costs

The trustees of DC schemes or schemes with a DC section have to prepare a Chair's statement within seven months of the end of each scheme year.  It has always been necessary to include some information about charges and transaction costs in the Chair's statement.   However, the legal requirements changed in April 2018.  Trustees must now include more information about charges and transaction costs in the Chair's statement.  They must also make information publicly available on a website and signpost members to that website   In this insight, we look at what has changed and when the new requirements will apply to schemes.  We also touch on a second change, due to take effect in April 2019.

What has changed?

Under new legislation, which came into force in April 2018, the Chair's statement must:

• state the levels of charges and transaction costs that applied to each default investment arrangement during the scheme year; and
• state the levels of charges and transaction costs that applied to each fund which members are able to select and in which any member was invested during the scheme year.

In other words, if there is more than one default arrangement, it is no longer sufficient to give the range of the levels of charges and transaction costs that applied during the scheme year.  It also means that that, for self-select funds, it is no longer sufficient to give the range of the charges and costs that applied to funds outside of the default arrangement.

The Chair's statement must also:

• include an illustrative example of the "cumulative effect, over time, of the application of the charges and transaction costs on the value of a member’s accrued rights to money purchase benefits";
• indicate any information about transaction costs which the trustees have not been able to obtain and explain what steps are being taken to obtain that information in the future; and
• explain the trustees' assessment of the extent to which the charges and transaction costs represent good value for members.

Trustees will be familiar with the last two requirements.  However, the requirement to prepare an illustrative example of the effect of charges and transaction costs is new, and likely to need careful thought.

Trustees must also make the following information publicly available, free of charge, on a website.  In practice, this is likely to involve publishing the relevant sections of the Chair's statement (or the whole Chair's statement) on a website:

• the information the trustees included in the Chair's statement to comply with the requirements listed above; and
• the information the trustees included in the Chair's statement about the statement of investment principles (SIP) for the default arrangement and the review of that SIP.

In addition to publishing this information on a website, trustees must:

• provide a hard copy of it within 2 months if (but only if) it would not be reasonable for the person who has asked for it to obtain it from the website; and
• update annual benefit statements to include details that will signpost members to the information published on the website and explain when a hard copy of the information on the website will be provided on request.

Is there any guidance?

DWP guidance on cost and charge reporting, was published in February 2018.   This guidance sets out what trustees need do to comply with the requirements to prepare an illustrative example of the effect over time of the scheme's costs and charges, and to publish this and some other parts of the Chair’s statement on a website for public consumption.

In terms of status, the guidance is statutory and contains a confirmation that, if trustees "do not comply with [relevant legislative requirements] by virtue of a failure to have regard, or to have proper regard, to this Guidance, the Pensions Regulator may take enforcement action which includes the possibility of a financial penalty".

One key point for trustees is that the new legislation only sets the minimum legal requirements.  Provided the minimum legal requirements are met, trustees can adapt presentation and communication to meet the needs of their members.

When do the new requirements apply?

Trustees should take legal advice on when the new requirements will apply to their scheme.   In broad terms, they will apply from the last day of the first scheme year to end on or after 6 April 2018.    For example, a scheme whose scheme year ended on 6 April 2018 will have seven months from that date (that is, until 6 November 2018) to comply.  A scheme whose scheme year ends on 30 March 2019, will have the seven months to 30 October 2019 to comply.

Osborne Clarke comment – and further changes in April 2019

These changes are intended to give members access to more information about their pension savings.   They are also intended to make it easier for trustees, employers, members and others to compare the costs and charges in different schemes and funds.

The changes are supported by new FCA rules, which took effect in January 2018 and require asset managers and insurers to provide trustees with information about charges and costs.  However, in the first year in particular, it is likely to take trustees some time to consider the changes with their advisers, gather the information they need and comply with the new requirements.

For the trustees of a scheme that reached the end of its scheme year on 6 April 2018, or has reached the end of its scheme year since 6 April, the clock is ticking.  The trustees need to take immediate action to make sure they comply within seven months of the end of the scheme year.

The trustees of other schemes have more time.  However, they might still like to discuss the new requirements with their advisers and agree steps to take now, to help to prepare.

Finally trustees  should note that more changes, this time requiring disclosure of information about pooled funds, will come into force on 6 April 2019.  The trustees of DC schemes or DC sections should discuss these changes with their DC consultant now, as all affected schemes will need to be ready to provide information on 6 April 2019.