Disclosure of costs, charges and investments in DC occupational pension schemes – Sackers’ response to consultation

Background

The DWP is consulting on the policy and proposed regulations for how costs and charges information should be published and made available to members; and for members to request information about the funds in which their money is invested.

In this response

• General comments
• Disclosure of costs and charges information
• Investment disclosure

General comments

We welcome the DWP’s proposals to bring clarity to DC pension scheme costs and charges.

As legal advisers to trustees, employers and providers of workplace pension schemes, our comments relate to those aspects of the consultation which are relevant to our practice. We have not sought to answer every question in the consultation.

Disclosure of costs and charges information

Introduction of the new requirements – timing

The duty on firms which look after DC assets to provide costs and charges information to trustees will apply from 3 January 2018. It is currently proposed that the draft regulations, which will introduce the obligation on trustees to provide this information to members, will come into force from 6 April 2018. The new reporting requirement is set to apply to schemes “on the last day of the first scheme year for that scheme to end on or after 6th April 2018”.

However, it could be beneficial to give the new requirements time to bed down at the “asset manager” end of the process, before the new trustee reporting requirements come into force for the following reasons:

• We understand that providers do not anticipate being able to provide that information immediately on 3 January 2018, which would shorten the amount of time trustees then have to do their preparatory work.
• The trustees may also wish to ask follow-up questions when the information is first received from the asset manager (or platform provider), especially in the first year when the information is new. This could slow down the time in which the information is fully disclosed and understood by the trustees.
• We do not yet know the form in which asset managers will provide the information to trustees. It is possible that information will be provided in different formats by different providers. A single trustee board may have different sets of information to harmonize and contextualise before it will make sense for different members across their scheme. This could take time to manage effectively, and to avoid sending out rushed messages to members.
• We note also that the FCA is expected to consult on corresponding rules for personal pension schemes in 2018. We consider that there would be merit in waiting for these rules, to ensure that cost and charge disclosure requirements are consistent across all DC schemes, wherever possible.
• We understand that the final regulations are not expected to be laid until February/March 2018 which means some trustees would not have very long to factor the new requirements into their governance processes before they take effect.

How should information be presented and contextualised?

Paragraph 16 (on page 13) explains the DWP’s view that supplementary contextual information “should help savers understand when they are comparing like-with-like and when investment approaches are not comparable”. We agree that contextual information will be necessary to help members understand the implications of the costs and charges information that they are provided with. A poorly delivered message about costs and charges could, in some cases, lead to an adverse member decision and therefore an adverse member outcome.

We note that the DWP wishes to give trustees the freedom to choose how they present costs and charges information to members. In some respects, this will be welcome, as it will allow information to be tailored to a particular scheme and its membership. However, a balance needs to be struck between giving trustees this freedom, and ensuring they have sufficient guidance to enable them to meet the new legal requirements, without inadvertently falling foul of regulatory expectations. Early guidance from TPR in this respect (along the lines of the recently published guidance relating to the content of the chair’s annual statement) would be helpful.

We note the DWP’s comment at paragraph 64 (page 21) that trustees should “include an illustration of the compounding effect of the costs and charges affecting their pension savings and a ‘£ and pence’ illustration, for ease of member understanding”. Paragraph 67 (page 21) notes that it would not be practically possible to do personal illustrations for individual members and, following discussions with some clients, we agree with this statement. However, we would welcome clarification of what is expected of schemes here, particularly where members are invested (to different degrees, depending upon their age and target retirement date) in default lifestyle strategies and blends of other funds. The example provided in the statutory guidance does not set out how such information should be provided in such cases.

The need for trustees to request information

The obligation on asset managers to provide information is triggered by a request from trustees for that information. Therefore, where trustees do not make a request, it appears that there is no obligation to provide the information to them. It would be helpful for this to be noted in the relevant guidance so that trustees are aware of this.

How should the information be given to members?

In our view, there is no practical reason for including the chair’s annual statement within the annual report and accounts, other than to make sure their timelines coincide. If the direction of travel is for a chair’s annual statement to include more detailed information and to be disclosable on a website, it could make sense to de-couple it from the annual report and accounts. It could instead be published as a standalone document within the same timeframe. This may increase member engagement, as they would not need to search for information buried within a much longer document.

Alternative formats

We agree with the DWPs comments that requiring trustees to use the existing process under the Disclosure Regulations for providing information electronically could be burdensome (paragraph 73 on page 23). As such, we support the suggestion of publishing the required information publicly online.

Investment disclosure

In our view, it is in members’ interests to have information on their pooled fund investments, and we agree that certain information about the funds on offer should be made available. However, we consider that the proposals and draft regulations could be clearer as to the information that trustees will need to provide.

Signposting members to information about their investment choices, and making it clear where and how they can request further information about the funds in which they are directly invested, is important. We also agree that the annual benefit statement is an appropriate place to include this information.

White labelled funds

Where “white labelling” is used, care needs to be taken to ensure that the information made available to members focuses on the overarching objectives of those funds, such the asset strategy and factors relevant to members in deciding whether to select those funds (such as a fund’s risk profile), rather than on details such as the fund manager’s name and profile.

Trustee flexibility to make changes when in members’ interests

It will be important to have flexibility to make sure that the information is presented in a way that does not cut across trustees’ flexibility to make changes to the managers and funds used where that is in members’ interests.

Member engagement

We note, and support, the DWP’s comments that “annual disclosure on request of the pooled funds in which the member has been invested over the previous scheme year will be helpful for members, whilst resulting in less overall work for trustees than answering in-year requests from members about the scheme’s current holdings.”

However, in our experience, many schemes already provide key information about the funds available to members, for example, on a scheme’s website. Often, this information is presented in a way which explains the overall strategy of the fund, and allows members to drill down into the detail (including current investment holdings and asset managers), should they wish to do so. As a result, although the volume of in-year “speculative” enquiries from members might be low, this does not automatically correlate with low levels of engagement.

Level of detail to be provided

We agree with the comments reported in the DWP’s response to the “Better Workplace pensions: Reducing regulatory burdens, minor regulation changes, and response to consultation on the investment regulation”, to the effect that providing information which is very detailed (or in a non-standardised format), can hinder member understanding. For example, providing information on the voting records of pooled fund managers is likely to be a burden for trustees, and may not facilitate member decision making. In our view, trustee investment disclosure obligations should be limited to information which is readily within the trustees’ control.

As with the information on charges, appropriate contextual information can aid member understanding of investment options.