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Mondial | Publication | August 2018
Is your annual chair’s statement member-friendly, and informative enough, to avoid a fine? We are seeing increased regulatory action over the quality of statements on defined contribution governance, with more than 10 per cent of defined contribution arrangements being targeted for fines. It isn’t enough just to include a statement about the governance of your defined contribution scheme or section; it has to be actually informative and reveal the thought processes behind trustee choices. If not, the Pensions Regulator has no choice but to issue a fine.
We commented earlier this year about upcoming changes to the requirements on trustees for chair’s statements for scheme years ending after April 5, 2018. However, there is another, less visible change to these requirements to take into account.
Now that pension schemes have had some practice at including statements in their annual reports about the governance of their defined contribution (DC) arrangements, the Pensions Regulator is starting to focus much more on the quality of those statements, and starting to issue fines. It is taking the view that it must fine schemes not just if trustees fail to produce a statement at all, but also if the statement is published but does not adequately comply with the requirements. Based on the Pensions Regulator’s own statistics, more than 10 per cent of affected UK schemes have now received fines, most commonly between £500-600, but penalties can go up to £2000. Trustees whose fines are upheld are listed by name on the Pensions Regulator website.
The Pensions Regulator did recently have to row back from 74 fines over the quality of statements, but those fines were revoked only because the Pensions Regulator accepted that there had been a time delay on its part in explaining to the relevant schemes why their statement was not compliant. We cannot expect that bar to apply in the future and the Pensions Regulator is performing spot checks.
DC may historically have been the poor relation, but it’s in the regulatory spotlight now. So how do you pass the quality test? We’ve had quite a bit of practice recently in helping clients step up to the new expectations, so we have set out below a few tips on how to make the Pensions Regulator, and scheme members, happy. The trick is not just to clone last year’s report but treat this next annual report as a new exercise in getting the chair’s statement up to scratch.
Focus on the member: the Pensions Regulator emphasises the need to write clearly enough for members to understand. Unless scheme members are universally financially sophisticated, check your language – would the average member of the public understand all of it? If not, try again.
Explain and describe: simply stating that the trustees are satisfied that XYZ standard or requirement has been met is not sufficient. The legislation uses wide open words like “explain” and “describe”. That means, to be compliant, you need to summarise the evidence that led the trustees to reach that conclusion for this particular scheme year. We have given you some examples below of where the legislation expects more than you might think.
When you think about it you probably do a lot of this – it’s just about taking credit for it by giving more detail in the chair’s statement and showing that it is a focus for the trustee board.
The chair’s statement must include details of charges and transaction costs for each of the funds available to members. A table is the simplest way to do this. For future scheme years you will need to analyse the cumulative effect on members, as well, with illustrative examples. Standards in this area are likely to rise quickly as the industry gets to grip with the need for transparency.
If you operate some lifestyle options, think about how you present this. Just showing the cost for each component part might not help the member much. The actual net charges and costs for a member will probably depend on their distance from retirement age so will differ for every member. Could you show average costs by age bands to give people a better idea? Or point members to their annual statements to work out what their personal mix of funds would currently be?
The Pensions Regulator has a new appreciation of its obligation to police the standards of governance statements so trustees can expect far more stringent scrutiny of DC chair’s statements.
Take a fresh look at your chair’s statement from last year against these standards. Would it now count as member-friendly, and informative enough, to avoid a fine, or does it need a rethink for this current year?
Use the Pensions Regulator’s guidance – on the website there is a detailed list of what has to be in your chair’s statement, as well as more guidance on good, and bad, practice.
Your advisers can help – make sure you engage us in good time with the challenge of improving quality.
The Pensions Regulator has no discretion not to issue a fine if a statement doesn’t satisfy the obligation to describe and explain key governance features, so aim for more rather than less.
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