Preparing for the chair’s annual governance statement

Introduction

Subject to certain exceptions, on and from 6 April 2015 new governance standards apply to all occupational DC schemes and the DC elements of hybrid schemes (see our Alert for details). Trustees are now required to include an annual statement regarding governance (“the Statement”) in the scheme’s annual report and accounts describing how these requirements have been met.

In this Alert

Key points
Background
The Statement
What is “good value”?
What should trustees be doing?

Key points

The Statement is due within seven months of the scheme’s year end.
Where the first scheme year ending after 6 April 2015 is sooner than 5 April 2016, the statement should relate to the period from 6 April 2015 to the end of the first scheme year, except where the period covered would be less than three months (in which case this period can be rolled up into the following year’s statement).
As it forms part of the annual report and accounts, the Statement should be subject to the same level of scrutiny as the rest of the document.
Trustees must confirm whether or not they have produced the Statement in the scheme return.
Trustees who do not produce a Statement will be liable to a penalty of between £500 and £2000.

Background

The new governance measures aim to improve standards in occupational DC schemes. (The FCA has made similar provision for contract-based schemes with the introduction of IGCs (see our Alert for details)).

Under the new minimum governance standards trustees are required, among other matters, to:

design default arrangements in members’ interests and keep them under regular review
ensure that core financial transactions are processed promptly and accurately
assess the value of costs and charges borne by scheme members.

Exceptions

Certain schemes are exempt from the new governance requirements. These include:

schemes whose only DC benefits are AVCs
executive pension schemes
small self-administered schemes.

The Statement

Every year the trustees will have to confirm in the Statement how the scheme is meeting the new governance standards. For example, the trustees must:

describe how the trustees have secured that core financial transactions are processed promptly and accurately
report the level (or range) of charges and transaction costs in the default arrangement(s) and the range of costs and charges in other funds and the trustees’ assessment of the extent to which the charges represent good value
describe how the TKU requirements have been met throughout the year and give an explanation as to how the trustees have, or have access to, all the competencies necessary to run the scheme properly.
The Statement must be signed by the chair, on behalf of the trustees.

What is “good value”?

There is no statutory definition of “good value”. This means that trustees will need to develop their own assessment process.

The DWP expects trustees to use TPR’s guidance on value for money as a base line for consideration. According to TPR, a value for money scheme is one in which the costs of membership provide good value in relation to the benefits of membership, when compared with other options available in the market. However, this “does not necessarily mean low cost, provided higher costs can be justified by improved benefits”. It is therefore important to weigh factors such as cost, against the value members would place on matters such as good administration and clear communication. In other words, a well-run scheme may cost more but it could lead to better outcomes for members and therefore be of “good value”.

For further details, please see our article, “What is value for money?”

What should trustees be doing?

Trustees need to prepare a plan of action for gathering the necessary information to complete the Statement. The specific timetable will be dictated by the scheme’s year end. For assistance with the process and the contents of your scheme’s first Statement, please speak to your usual Sackers’ contact.