Defined contribution schemes should disclose costs and charges to members by signposting a link in their annual benefit statement, the Department for Work and Pensions has proposed, as the industry agrees communications need to be kept simple.
The vast majority of schemes that are subject to the 0.75 per cent charge cap on default funds had charges of less than 0.6 per cent, according to the DWP’s Pension Charges Survey 2016, but transaction costs are not currently included in this.
I’m all for transparency, but you’ve got to look at what actually works. If you have too much detail, people simply don’t read it
Andy Cheseldine, Capital Cranfield
While many members are paying low charges, a continued push for greater cost transparency on investments – both on an EU and national level – means the DWP is now consulting on how trust-based DC schemes should publish such information to members.
It also asks for views on how to provide information, if a member asks, about the funds in which their money is invested. The consultation closes on December 6 this year.
The Financial Conduct Authority recently told asset managers to disclose transaction costs to defined contribution schemes from next year. The DWP is continuing in this vein by exploring how schemes should pass on this information.
It aims “not to be prescriptive as to where costs and charges information is published as long as it is published on the internet for public consumption”. Figures should be presented in pounds and pence.
“We propose that each 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 document added.
DWP survey shows big variation in how transaction costs are applied
The DWP survey of 14 providers found while some do not apply transaction costs for fund entry in their default, others do:
Two were unable to say whether or not transaction costs for fund entry applied at all.
Six confirmed that transaction costs for fund entry did apply to members invested in their default arrangements but were unable to provide data.
Four providers reported that transaction costs for fund entry do not apply to their default arrangements.
Two were able to provide at least indicative data on how the costs apply to their schemes: transaction costs for fund entry typically led to a reduction of between 0.05 per cent and 0.40 per cent of each contribution.
Only four providers could estimate the level of transaction costs for remaining invested. Typically they ranged between zero per cent and 0.5 per cent of all members’ total funds invested per year, although one said that transaction costs could exceptionally increase to above 1 per cent in cases where there are property funds involved in the pension fund investment.
Costs and charges will therefore not have to be included in the annual benefit statement itself, but members will have to be told where to find them.
Members need value for money understanding
Alan Morahan, managing director, DC consulting at Punter Southall Aspire, welcomed the draft rules.
However, he said it was important not to give the impression to members that “cheaper means better”, warning: “Without the right level of understanding we could see transparency driving ‘wrong’ decisions.”
Trustees and good governance will therefore have a crucial role to play, he said, particularly as most DC members are disengaged.
Schemes should keep comms simple
Andy Cheseldine, client director at professional trustee company Capital Cranfield, argued there is a disconnect between a general drive to simplify member communications and a regulatory push to introduce cost disclosure.
“I’m all for transparency, but you’ve got to look at what actually works. If you have too much detail, people simply don’t read it,” he cautioned.
Communications consultancy Quietroom has recently produced an example of a ‘universal retirement account statement’, with the help of law firm Eversheds Sutherland, the Pensions and Lifetime Savings Association and the Association of British Insurers.
FCA forces asset managers to disclose transaction costs
The Financial Conduct Authority continued its transparency reform this week, with the release of a policy statement requiring greater transaction cost disclosure for workplace pensions.
The statement shows pot value, employee contributions and projected pension in simple terms, highlighting the numbers and using basic imagery.
“The more we can give information to members in a pictorial format, the more likely… members are to read and understand what they’ve been given,” said Eversheds Sutherland partner Anthea Whitton.
If members are given a 10-page brochure, “actually human instinct is to read the first page and not the rest”, she argued.
Is continuous disclosure necessary?
Whitton highlighted that the need to see costs and charges is mainly for comparative purposes.
“I think it’s good for [members] to see it on an everyday basis, but actually when it becomes key is when you’re switching funds or switching scheme,” she said.
Laurie Edmans, trustee chair of Trinity Mirror's DC scheme, went even further, saying charges are not a big issue anymore for members' benefits. "My initial impression is that they are fighting the last war," he said about the DWP's consultation.
"I would love to see the same focus on maximising member outcomes, looking at the whole picture, not just the apparently easy target of costs. If members are going to be ‘pushed’ anywhere, it should be towards making sure they capitalise on employers contributions."
