The Department for Work and Pensions has acknowledged that the introduction of chair’s statements has failed to meet the policy objectives set out by the department in 2014.
“Significant weaknesses” in the defined contribution set-up were identified by the Office of Fair Trading in 2013, and over the course of the two years subsequent the DWP first consulted and then legislated on remedies that would allow DC savers to benefit from competition in the industry.
The changes were principally in the areas of governance, charges and transparency, and among the range of measures brought in were chair’s statements, which mandate schemes’ trustees or managers to prepare and publish a range of documents including annual reports and accounts, its default investment strategy, and other materials relating to governance and charges.
But the statements, which must be published within seven months of the end of each scheme year — and reported to the Pensions Regulator — have been found wanting after the DWP conducted a review into their efficacy.
The multipurpose nature of the chair’s statement has bought many challenges for trustees. It’s become too long and costly to produce and is more a regulatory document than a member-facing communication
Kate Smith, Aegon
“The review has identified... that the policy objectives in relation to the chair’s statement are not being achieved within the current approach,” the DWP’s post-implementation review document stated.
“In particular, using a single instrument — the chair’s statement — to try to achieve multiple policy goals, in respect of scheme governance and member engagement, does not work.”
It continued: “The purpose of the statement was intended to act as part of a suite of measures to deliver better scheme governance standards, and this review has identified it should be refocused to deliver that goal.”
Among the many problems identified by the review, it was found that the industry as a whole was unclear who was supposed to be the audience for chair’s statements, as well as uncertain about their broader purpose.
Some respondents to the review said they had come to regard the chair’s statement as a “tick-box exercise”, while others said they were not “clear as to whether the chair’s statement is intended to be a governance compliance document or aimed at providing transparency by providing certain information to scheme members”.
“It is currently operating as a document intended for multiple audiences,” the review stated.
It was also highlighted that chair’s statements were not fulfilling the goal of improving member engagement.
“It was suggested that in the experience of trustees, the statement was read primarily by TPR, industry experts, consultants and potentially other trustees. Very few scheme members look at it,” the DWP’s response stated.
Though most respondents said that some form of chair’s statement was essential, “there was unanimous opinion that a multiple-purpose approach cannot be contained in one document”.
“It does not work as a communications tool for members and there is little evidence that members know it exists,” the response noted.
Too long, too complex, too costly
The DWP’s review concluded that the multipurpose nature of the chair’s statement was responsible for many of the problems, with the result being a significant cost and governance burden that failed to fulfil any of its core functions properly.
“There is general concern about [the] compilation of the statement. Interpretation of current requirements means the documents are very long (in some instances approaching 100 pages), extremely technical, too prescriptive and complicated,” it noted.
Additionally, the cost of preparing a chair’s statement can be considerable, often costing “in the region of £15,000–£20,000 to produce, once fees for data collation, drafting, legal review and auditors are factored in”.
Meanwhile, TPR does not have the power of discretion, being unable to choose when and where to impose mandatory fines for non-compliance.
“This has made compilation of the chair’s statement resource and cost-intensive — consultancy and legal review fees, staff time spent by in-house pension teams and trustees — to ensure mandatory penalties are avoided. This cost ultimately falls on the scheme members,” the review stated.
In its conclusion, the DWP said that the nature and make-up of the chair’s statement should be revisited, as well as the information to be contained within it.
“Further work will be required between DWP, TPR and industry representatives to ensure common agreement on content. This would enable the chair’s statement to be shorter and more focused than the way it is implemented under current requirements,” its response noted.
Industry vindicated
The acknowledgement by DWP that chair’s statements are not having the desired effect vindicates a warning issued in February by LCP.
As Pensions Expert reported at the time, the consultancy warned that a single document could not possibly be expected to satisfy the needs of regulators and members, as the kind of “lawyer-proofed” information communicated to TPR is too dense to be of use to scheme members.
LCP partner and head of DC Laura Myers argued then that the goals of informing members and informing the regulator should be catered for by two separate documents.
She also argued that the regulator should relax the rules mandating fines for non-compliance in favour a more “proportionate approach”.
Speaking after the publication of the DWP’s review, Kate Smith, head of pensions at Aegon, said: “The DWP’s review has clearly demonstrated that there has been an overwhelming consensus that the chair’s annual statement in its current format is simply not working.
“The multipurpose nature of the chair’s statement has bought many challenges for trustees. It’s become too long and costly to produce and is more a regulatory document than a member-facing communication,” Smith continued.
“To top it off, it’s rarely read by its original intended audience, the members. The chair’s statement clearly doesn’t work for multiple audiences.”
Calls for DWP to change chair’s statement rules
The Department for Work and Pensions is to publish a review of the effectiveness of defined contribution chair’s statements in April, which has prompted some specialists to call for a major rethink.
Welcoming the DWP’s acknowledgement of reality, Smith seconded Myers’ call for two separate documents, one for the regulator and one for members, as well as her comments on fines.
“Currently, TPR is obligated to issue mandatory fines, even for immaterial breaches, and naming and shaming fined trustees on their website,” she explained.
“We had called for TPR to be given discretion on whether to issue such fines, particularly for master trusts which are closely supervised by the regulator. We’re pleased that the DWP is looking into a possible amendment to the legislation to enable this.”
