DC schemes – disclosure of investment administration charges and transaction costs proposals to go ahead

The DWP has issued its response to last autumn’s consultation 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 (see Pensions Bulletin 2017/45).

These new requirements will cause significant work for DC schemes during the next 12 months or so while affected schemes set up the new mandatory processes and communications.

The part of the consultation that attracted most comment is the requirement that trustees should also provide an illustration of the cumulative effect over time of the costs and charges affecting members’ pensions savings, with the draft statutory guidance suggesting that where a range of funds is made available, with different assumed levels of growth, the illustration should be for a representative range of investment returns, including the lowest, highest and most popular.

The guidance also suggested that the illustration should be on a “£ and pence” basis for a realistic and representative range of combinations of pot size, contribution rates time and rate of charges and costs.  This guidance included a multi-row and multi-column table example and showed that the Government intends these illustrations to be reasonably in-depth and meaningful.

There is also a requirement that the cost and charges information is freely published on the internet for public consumption and that every member who receives an annual benefit statement should be provided at the same time with a web address where members can find the costs and charges for their scheme.

The Government intends to press ahead with its plans with little change (as had been expected) other than some relatively small technical changes to make the requirements smoother and more coherent.

This means that sometime after 6 November 2018 or later the majority of workplace schemes providing DC benefits (but, importantly, not DB schemes where the only DC benefits are AVCs) will need to publish more detailed information about charges incurred by their members.  This date is the earliest that a scheme may have to comply by, being 7 months (the timescale for producing a Chair’s Statement) after a scheme year end of 6 April 2018 (when the regulations will come into force).  Schemes with later year ends will have a correspondingly longer time to prepare (up until 5 November 2019 for schemes with year ends of 5 April).

The consultation received a high level of interest with 46 responses in total submitted to the DWP.  Consequently the DWP’s response goes into some detail in addressing all the concerns raised.  The Government reiterates its view that “the key objective in requiring disclosure and also publication of charges and transaction costs is to assist the function of a healthy market in an area which is perceived as being opaque.  Publication of charge and transaction cost information will enable trustees and others to compare the value for money they are receiving with their peers, thereby driving better market outcomes.  By giving wider industry participants and commentators access to the data, this could also assist in the development of benchmarking services”.

Costs and charges

The Government is proceeding essentially as set out in its consultation without making any significant changes.  The response paper addresses concerns raised in some detail but by and large rejects them all.  However, the DWP does stress in several places the lack of prescription in what it is requiring and that trustees will be able to meet the requirements – including for the “£ and pence” illustration – in several ways and provide additional contextual information should they wish.

Trustees should also note that the DWP has rejected any easement for schemes with a large number of default funds.  The DWP’s view is that “if a scheme can carry out the due diligence to select and offer a fund, they also have a duty to carry out the governance to report on the level of costs and charges which members who select the fund will face”.  In general, the DWP is unsympathetic to concerns that these new requirements will lead to an increased burden on schemes – indeed in the context of the requirement to make the information freely available on the internet the DWP dryly notes that “schemes always have the option to consider alternative strategies to limit any additional burdens, for example, consider consolidation into larger schemes using the new simplified process for DC-DC bulk transfers”.

The DWP has also published updated statutory guidance focussing mainly on the production of the illustrative table.  This is largely unchanged from the previous draft issued alongside the consultation.

Investment funds

The second part of the consultation concerned investment disclosure.  For this the Government proposed 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)

In response to feedback the Government has made some changes to these requirements so that now:

• Trustees have a duty to begin to disclose pooled fund information from 6 April 2019, and the information must be no more than 6 months out of date at any time
• Disclosure is based on the investment options in which the member is invested at the time of their request, rather than those in which they were historically invested over the previous scheme year; and
• Trustees only have to provide this information once in a six month period

The legislation to give effect to all of these new requirements is The Occupational Pension Schemes (Administration and Disclosure) (Amendment) Regulations 2018 (SI 2018/233) which has now been laid before Parliament.

Comment

Although there is at least eight months (and possibly up to 20 months) before the absolute final deadline for schemes to comply with the new requirements, preparing the new illustration table in particular will be demanding and trustees should not leave it until the last moment to put it together.  On the one hand the lack of prescription is good as it gives leeway for trustees to tailor the information for their members but, on the other hand, we have seen in other situations that a lack of prescription can lead to confusion as to what is actually compliant resulting in overkill to ensure requirements are met.  Industry practice about these requirements will surely evolve over time.

DWP finalises new bulk transfer without consent law for DC benefits

The DWP has finalised regulations that will change the rules that govern how pure DC benefits can be bulk transferred without member consent from one occupational pension scheme to another.  The new regime is broadly as proposed in October, but there are some significant adjustments to what was set out then (see Pensions Bulletin 2017/45 for details).

In the response to the consultation published on 26 February the DWP highlights the following changes:

• The independence requirement for advisers has been softened. Such advisers must now not have received payment, in the year leading up to the date the advice is provided, for advisory, administration or investment services to the receiving scheme, service provider or employer (or a connected firm)
• The requirement to seek independent advice has been removed where bulk transfers take place between schemes whose sponsoring employers are connected
• Trustees of schemes that fall under the new regime will not be able to opt to continue to use the old actuarial certification regime – but to safeguard against those bulk transfers currently underway, this restriction will not come into force until 1 October 2019
• It will now be possible to transfer without consent between non-default arrangements without triggering the charge cap restrictions where the member has in the five years ending with the date of the transfer expressed a choice as to where his or her contributions were allocated

The Occupational Pension Schemes (Preservation of Benefit and Charges and Governance)(Amendment) Regulations 2018 (SI 2018/240) come into force on 6 April 2018.  The DWP is also intending to issue non-statutory and high level guidance by the end of April whose purpose is to assist trustees operate the new regime.

Comment

We very much welcome the new regime – it making little sense to follow a process designed many years ago with DB transfers in mind.  The new regime should also aid voluntary DC consolidation, with the main beneficiaries likely to be the master trusts.  But the regulations deliberately give no hint as to what constitutes a proper process for DC before the trustees take an irrevocable decision to transfer members’ pots without their consent to another scheme – for this we need to await the guidance.  So, having an optional 18 month window is very useful, not only for the bulk transfer projects currently underway, but also as it may be some time before DC-focussed processes can be put in place that all parties are comfortable with.

Having taken this welcome step, we hope that the DWP will be receptive to any issues that arise as the new regime is applied in earnest.

Deferred debt arrangements introduced without the proposed funding test

“Deferred debt arrangements” are to be introduced as yet another alternative to employers paying the full “Section 75” debt due when an employment-cessation event occurs according to the DWP’s response to its April 2017 consultation (see Pensions Bulletin 2017/18).  And there is further good news for employers that might be interested in using a deferred debt arrangement, as the proposed “funding test” that had to be met before using it has now been removed.

Currently, when an employer ceases to employ active members of a defined benefit pension scheme whilst other employers still have active members, a Section 75 debt is due unless certain other circumstances have occurred.  The deferred debt arrangement provides that, as long as the employer remains a participating employer of the scheme (ie a “statutory employer”), it does not have to pay the Section 75 debt immediately if certain conditions hold including:

• The scheme is not in a PPF assessment period or being wound up when the deferred debt arrangement takes effect; and
• The trustees of the scheme are satisfied that the scheme is unlikely to enter a PPF assessment period in the next 12 months

Importantly, the proposal that the scheme has to pass a “funding test” (that in the trustees’ view the remaining employers are reasonably likely to be able to fund the scheme and the security of the benefits are not adversely affected) has not been carried through into the final regulations.  Instead, the trustees must be satisfied that the deferred employer’s covenant is not likely to weaken materially in the next 12 months.

The regulations also clarify the circumstances under which a deferred debt arrangement ceases and increase the notification period for employers to write to trustees to seek permission to use a grace period from two months to three months.

Finally, the regulations now contain a requirement that the Secretary of State must carry out a review of deferred debt arrangements from time to time, with the first report being published before 6 April 2023 and subsequent reports at intervals not exceeding five years.  This is as a consequence of a requirement contained within the Small Business, Enterprise and Employment Act 2015.

The Occupational Pension Schemes (Employer Debt and Miscellaneous Amendments) Regulations 2018 (SI 2018/237) come into force on 6 April 2018.  The Pensions Regulator is also updating its “Multi-employer schemes and employer departures” guidance.

Comment

Deferred debt arrangements also address an apparent anomaly with the existing multi-employer Section 75 debt regime.  Currently, if an employer ceases to have active members at the same time as all other employers, the employer doesn’t have to pay a debt, but if the remaining employer continues to have active members the employer has to pay a potentially very large debt.

Many employers will welcome this additional option when an employer debt is triggered by employment-cessation.  The Government anticipates this easement will be used mainly for industry-wide schemes, but it isn’t hard to see its attraction for any employers in a multi-employer scheme that undergoes an employment-cessation event.  Why pay the debt now?

DWP finalises adjustments to bulk transfer of contracted out rights law

The DWP has finalised regulations that enable the bulk transfer without member consent of contracted out rights to take place between schemes of “connected employers” where the destination scheme has never been contracted out.  This addresses an oversight of the DWP’s making when, back in April 2016, destination schemes were restricted to those that had been contracted out.

The regulations have broadly the same intended effect as proposed at the end of December (see Pensions Bulletin 2018/01) but have been expressed somewhat differently as a result of the consultation that took place then.

Amongst the changes are the following (all relating to destination schemes that were never contracted out):

• Removal of the obstacle of the destination scheme having to comply with several sets of rules covering commutation, suspension and forfeiture
• Adjustments that enable the transfer of pensions in payment containing contracted out rights that were blocked under the original proposals; and
• Removal of the requirement that the transfer will not “adversely affect” section 9(2B) rights which was to apply in addition to the “broadly no less favourable” actuarial certification – instead, the benefits granted in respect of the section 9(2B) rights must be such that they would have met the reference scheme test as it had effect immediately before 6 April 2016. The FAS service-related cap passes into law

Under the now-settled proposals the definition of GMPs and Section 9(2B) rights are extended, so that they cover a never contracted out scheme.  This means that contracted out rights that transfer without consent to a never contracted out scheme will remain contracted out rights.  So, all the contracted out specific protections in relation to modification of benefits within the scheme will continue to apply in the new scheme.  And if the rights were to be transferred onwards again without consent (whether to a never contracted out scheme or a former contracted out scheme), they remain contracted out rights in the receiving scheme.

The Contracting-out (Transfer and Transfer Payment (Amendment) Regulations 2018 (SI 2018/234) come into force on 6 April 2018.

Comment

We are pleased to see that the DWP has been able to bring this issue to a quick conclusion following the consultation that took place only a few weeks ago.  From what we can see, the regulations successfully deliver on the policy intent and so from 6 April 2018 bulk transfers will no longer be blocked where contracted out rights are involved and the destination scheme was set up after contracting out ceased.  But as this has all been done in a rush (including only a one week window for an informal consultation prior to the public consultation) we are crossing our fingers that all will be well.

Pensions Regulator opines on the management of service providers

In a statement published last week, the Pensions Regulator sets out its expectations of good practice by trustees and scheme managers on the management of service providers, including planning for events which could have major consequences for their schemes, such as the failure of service providers.

This follows significant recent attention on companies providing outsourced services to government and industry, including pension schemes.

Comment

The content of this short statement is uncontroversial, but the timing is unfortunate, which might explain why it has popped up on the Regulator’s website with no attendant publicity.

Dominic Chappell fined £87,000 for failing to give information to the Pensions Regulator

Following his sentencing in January (see Pensions Bulletin 2018/03), Dominic Chappell, the former BHS owner, has been fined £50,000 for not responding to information notices in relation to BHS sent to him by the Pensions Regulator under section 72 of the Pensions Act 2004.  He also has to pay costs of £37,000 and a £170 victim surcharge.

In reporting last Friday’s decision of Barkingside Magistrates’ Court, the Pensions Regulator recites the judge’s remarks that “The court must send a message to those in senior positions that refusal to answer questions under section 72 will not be tolerated.  The law is there for a purpose and it must be enforced”.  The Regulator also states that its separate anti-avoidance action against Mr Chappell in respect of the BHS pension schemes is continuing.

Comment

Until recently, failure to co-operate with the Regulator in relation to its information powers could result, on conviction, in fines of no more than £5,000 in respect of each charge.  But since 2015 there has been no limit on such fines.

PASA publishes GMP rectification checklist

The Pensions Administration Standards Association has launched a new checklist whose purpose is to assist trustees and administrators when undertaking any rectification work to member records as a result of GMP reconciliation exercises following on from schemes ceasing to contract out.

The checklist identifies the points to be considered and the questions that need to be answered as part of a benefit rectification process.  PASA envisages that users of the checklist will also be familiar with its guidance notes published over an 18-month period to June 2017 (see Pensions Bulletin 2017/25).

The introduction to the checklist indicates that whilst the number of schemes involved in rectification may still be relatively small, this will increase as schemes approach the end of their reconciliation exercises.

Comment

The contents of the checklist make clear that rectification is far from a straightforward process with a number of decisions to be taken along the way.  It is therefore essential that trustees have confidence in those they ask to undertake the exercise on their behalf and there is appropriate communication between them during the project.

Reminder that the lifetime allowance is £1.03m for 2018/19

Whilst the November Budget confirmed the rise in the lifetime allowance to £1.03m for 2018/19 under the CPI-linked formula now in primary legislation (see Pensions Bulletin 2017/49), last week the Government made The Finance Act 2004 (Standard Lifetime Allowance) Regulations 2018 (SI 2018/206) that is the required technical step to put the number into law for 2018/19.

Comment

This is the first rise in the standard lifetime allowance for eight years.  So long as consumer price inflation remains positive we will see similar regulations at this time in each future year.  But right now the regulations are a timely reminder to pensions managers to make sure all retirement calculation processes and communications appropriately reflect the imminent new level.  The various protected lifetime allowance levels in Fixed or Individual Protections remain unchanged as the CPI indexation does not impact them.

FCA annuity comparison rules come into force

The Financial Conduct Authority’s new rules for annuity providers under which they must provide an “information prompt” to their customers, setting out how much they could gain from shopping around and switching provider, if appropriate, before they buy an annuity, come into force today (1 March 2018).

The rules were settled last May (see Pensions Bulletin 2017/23) and require the information prompt to be delivered in a standardised form.

The FAS service-related cap passes into law

Regulations have now been laid before Parliament in final form that create an increased assistance cap under the Financial Assistance Scheme for those with long pensionable service in their failed schemes (see Pensions Bulletin 2017/53)

The Financial Assistance Scheme (Increased Cap for Long Service) Regulations 2018 (SI 2018/207) came into force on 21 February 2018.  Those affected will enjoy higher assistance payments from the FAS from their first pay day after this date.

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.