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Cost disclosure is at core

Pension providers will have to disclose all costs and charges borne by members on an annual basis to meet The Pensions Regulator’s proposed principles for good defined-contribution provision.

Last week, The Pensions Regulator outlined 36 features it believes are “core components” of good defined-contribution schemes as part of a drive to raise standards ahead of automatic enrolment.

The key features are designed to underpin the six principles for good DC provision published by TPR in December. It is aimed at providers, trustees and employers. One of the key features states: “All costs and charges borne by members are disclosed to members annually.”

Scottish Widows head of pensions market development Ian Naismith says: “This is not something we do at present. We have a lot of up-front disclosure but we do not have anything in an annual statement which says, this is how much we have charged you in the past year. This would be quite difficult for us to do because some charges will be pounds and pence, some will be in percentages and some will be part of the fund price.”

Aegon regulatory strategy manager Kate Smith says meeting the principles will be more difficult for trust-based pension schemes which are not run by an insurance firm. She says: “As a provider, we have to demonstrate most of these principles to comply with FSA rules. Very large trustee schemes are likely to have good governance arrangements already in place. However, smaller non-insured schemes might need to do some work in order to meet these standards.”

Hargreaves Lansdown pensions investment manager Laith Khalaf says: “I suspect most contract-based schemes will meet most of the regulator’s criteria because they already have to meet the FSA’s standards. If you are running a non-insured trust-based scheme set up by an employer, then there is more of a risk of non-compliance.”

The Pensions Regulator chief executive Bill Galvin says: “We want to support the industry in demonstrating to employers and members that schemes are well designed and governed. These will form an important part of our regulatory approach and we will consult formally on that in 2013. We hope those responsible for designing and running schemes to be used for automatic enrolment will take these principles and features into consideration.”

The Pension Regulator’s 36 proposed principles

1. Essential characteristics

All beneficiaries within a pension scheme are treated impartially and receive value for money.

All costs and charges borne by members are transparent and communicated clearly at point of selection to the employer to enable value for money comparisons to be made and to assess the fairness to members of the charges.

Those running schemes understand and put arrangements in place to mitigate the impact to members of business and/or commercial risks.

Those running pension schemes seek to predominantly invest scheme assets with entities regulated by the FSA or similar regulatory authorities. Where unregulated investment options are offered, it must be demonstrable why it was appropriate to offer those investment options.

Those running schemes understand levels of financial protection available to members and carefully consider situations where compensation is not available.

Products offer flexible contribution structures to members and/or employers (over and above minimum scheme qualifying thresholds).
A default strategy is provided which complies with DWP default fund guidance and scheme investment strategy.

The number and risk profile of investment options offered must reflect the financial literacy of the membership. Different ranges of investment options could be offered to different membership ’groups’.

Investment objectives for each investment option are identified and documented in order for them to be regularly monitored.
A process is provided which helps members to optimise their income at retirement.

2. Establishing governance

Sufficient time and resources are identified and made available for maintaining the ongoing governance of the scheme.

Those running schemes support employers in understanding their responsibility for providing accurate information, on a timely basis, to scheme advisers and service providers.

Accountability and delegated responsibilities for all elements of running the scheme are identified, documented and understood by those involved.

Those running schemes establish procedures and controls to ensure the effectiveness and performance of the services offered by scheme advisers and service providers.

Those running schemes establish adequate internal controls which mitigate significant operational, financial, regulatory and compliance risks.

Arrangements are established to review the ongoing appropriateness of investment options.

3. People

Those running schemes understand their duties and are fit and proper to carry them out.

Those running schemes act in the best interests of all beneficiaries.

Those running schemes are able to effectively demonstrate how they manage conflicts of interest.

4. Ongoing governance and monitoring

Those running schemes are open and honest with their regulators and regulatory guidance is addressed in a timely and effective manner.

Those running schemes regularly review their skills and competencies to demonstrate they understand their duties and are fit and proper to carry them out.

Sufficient time and resources are made available for monitoring and reviewing schemes to ensure that they continue to meet good practice and continue to include the essential characteristics established under Principle 1.

Those running schemes maintain procedures and controls to ensure the effectiveness and performance of the services offered by scheme advisers and service providers.

Those running schemes maintain adequate internal controls which mitigate significant operational, financial, regulatory and compliance risk.
Those running schemes take appropriate steps to pursue and resolve all late and inaccurate payments of contributions.

Those running schemes monitor the ongoing suitability of the default strategy.

The performance of each investment option, including the default, is regularly assessed against stated investment objectives.

5. Administration

Member data across all membership categories is complete and accurate and is subject to regular data evaluation.
All scheme transactions are processed promptly and accurately.

Administrators maintain and make available their complaints process.

Administration systems are able to cope with scale and are underpinned by adequate business and disaster recovery arrangements.

6. Communications to members

All costs and charges borne by members are disclosed to members annually.

Members are regularly informed that their level of contributions is a key factor in determining the overall size of their pension fund.

Scheme communication is accurate, clear, understandable and engaging. It addresses the needs of members from joining to retirement.

Members are regularly informed of the importance of reviewing the suitability of their investment choices.

Those running schemes clearly communicate to members the options available at retirement in a way which supports them in choosing the option most appropriate to their circumstances.

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