Simpler annual benefit statements: draft regulations and statutory guidance – Sackers’ response to consultation

Background

The DWP is consulting on the draft Occupational and Personal Pension Schemes (Disclosure of Information) (Amendment) Regulations 2022 and associated draft statutory guidance (which includes an illustrative template). Together, these would introduce new requirements for the length and format of annual pension benefit statements, sent to members (except those in receipt of benefits) of certain defined contribution pension schemes used for automatic enrolment.

In this response

• Responses to specific consultation questions
• General comments

Responses to specific consultation questions

Q1. Do you have any comments on whether the draft regulations achieve our policy intention in relation to requiring use of a statement of one double-sided sheet of A4 paper for use by certain defined contribution pension schemes used for automatic enrolment (as defined in the draft regulations)?

To ensure that the schemes targeted are clearly within scope, we would suggest defining “money purchase benefits” by reference to section 181 of the Pension Schemes Act 1993. Although the definition of “qualifying scheme” applies the changes only to schemes “under which all the benefits which may be payable are money purchase benefits”, without a definition of “money purchase benefits” it is not clear whether DC schemes with DB underpins are in scope. For example, a DC scheme which contains a guaranteed investment return or a guaranteed annuity rate. Such schemes are not considered to be “hybrid” schemes as whether they are DB or DC depends on whether the underpin bites at the reference point. While such schemes are limited in number, we have clients who use them for auto-enrolment.

Q2. Do you have any comments on the draft statutory guidance in terms of content or clarity?

General

It is not clear from the draft guidance that compliance with the template statement will not result in compliance with the disclosure regulations unless additional wording is included. While this is addressed to an extent, for example paragraph 25 explains that certain signposts are required, we suggest the DWP provide more detail. We note that the PLSA’s technical guide to its simpler statement explained the mismatch between the statement and the requirements for a statutory money purchase illustration (SMPI) and suggested how this could be addressed. We are concerned that, unless the guidance spells out that further work will be needed to achieve compliance with the legislation, trustees / managers will assume that using the template is enough.

We are also concerned that, in meeting the requirement for length, trustees / managers will be forced to put important additional information elsewhere. This risks it not being read by members who may well assume the key details will be in the prominent statement.

It would be useful if the guidance made clear that it is open to schemes to determine how they meet the statutory requirements, provided they take the guidance into account.  Many of our clients put a lot of time and effort into their member communications and it would be entirely appropriate for them to adopt their own approach.

Specific

We find the messaging in paragraphs 23 and 24 of section 2 a little unclear. Is the preference for further information on costs and charges to be signposted or provided within the statement. The amount of information to be provided is already relatively lengthy. It is hard to see how schemes can provide meaningful costs and charges information while adhering to the required length. To be meaningful and comprehensible, costs and charges information needs a reasonable amount of explanation. If, as appears to be the case, the length of the statement is the priority, we would consider it preferable for additional information to be signposted. Providing costs and charges information without sufficient context and detail could lead members to opt-out (as highlighted in the original policy consultation), or to transfer to a less suitable or well-performing fund, based only on it being lower cost.

Similarly, we consider that more detailed guidance on what schemes are expected to include in section 4 would be useful. Paragraph 31 envisages the provision of illustrations demonstrating how changes to contributions and retirement age could affect a member’s ultimate pensions pot. As noted above, there will be little space to explain the parameters and potential shortcomings of such an illustration. Paragraph 32 is more helpful in noting that the range of additional information which could be provided predominantly involves signposting to tools and other resources.

One of the potential signposts in paragraph 32 is to information which may help a member with multiple pots to consider consolidating them. We understand this is a key policy for the Government. However, we would consider it helpful for the guidance to note that it may not be appropriate for all schemes to include such a signpost. For example, those where the employer pays all charges.

Q3. Do you have any comments on the illustrative statement template in terms of content or clarity?

The template does not include any disclaimer wording. It will be particularly important for it to be clear that the figures given in the illustration, section 3 (How much money you could have in retirement), are for illustration only and may differ from the final value of a member’s benefits.

In section 2, the template reads “Find out about costs and charges that apply to your Pension Plan, why we think they are good value for money and how they might affect the value of your Pension Plan over time at [web link]”. We would suggest this be revised to signpost trustees’ / managers’ assessment of their value. As noted above, many schemes will copy this wording wholesale and may, unintentionally, contradict themselves. Further, if a set of trustees / managers do not consider the costs / charges to be good value it would not be helpful for a bald statement to that effect to be made here. Members are better directed to a full explanation of the conclusion and this should be available in the chair’s statement.

Q4. Do you have any comments on the timetable in which it is proposed the regulations will come into effect, including the transitional provisions in regulation 3?

We consider the proposed timetable ambitious. Schemes are grappling with a lot of change at the moment as well as the same transition issues everyone is managing with regards to the probable return to the office. A change to annual benefit statements is not a simple one and, while the administrators can comment more specifically, we would expect a longer lead in time will be needed. Even those schemes with more extensive resources could struggle to have a new statement in place in time for the first document to be issued on / after 6 April 2022.

The current drafting of the transitional provisions is unclear. We understand the intention is to prevent schemes being required to issue a second statement in the new format in respect of the same scheme year, but do not think this is achieved. To avoid confusion, we would suggest the regulations apply in respect of the first scheme year ending on / after the date the regulations come into force (or whichever date the DWP deems appropriate).  We note that it is helpful for schemes to have plenty of time from the date the final version of the regulations and guidance are published to make the necessary changes to their systems and processes and that a delay between the in force date and the application date is therefore often useful.

Generally, but particularly if the proposed effective date is retained, we would encourage the DWP to issue the final regulations and guidance as soon as possible to give schemes the maximum time to prepare.

General comments

We note that the intention is to review the guidance at intervals not exceeding three years. Depending on the changes made, administrators / schemes will need sufficient time to adapt their processes to accommodate the alterations. This should be a factor in the effective date of such future changes.

We also note that the small pots project and the introduction of the pensions dashboards are likely to impact the priorities for scheme communications in the short term. This, together with developments in digital communications and thinking around pensions communications in general, may mean a review would be advisable earlier than currently envisaged.