Analysis: Industry experts have questioned why regulators have taken different approaches when it comes to the disclosure of funds costs and charges in chair statements.
The Financial Conduct Authority published on Tuesday a policy statement setting out rules for workplace pension providers to disclose costs and charges to its members.
One of the requirements is that contract-based scheme governance bodies – normally independent governance committees – will only have to disclose information on costs and charges for the provider’s default funds in their chair report. The information about the remaining fund options can be made available in a public website, linked in the report.
Consumers could have mistakenly gone into a high-charging fund by accident and be clueless to the impact fees are having on their pot. It’s these very consumers that need to be protected by disclosure, not those in the default
Clare Reilly, PensionBee
But this is a different approach from the one taken by the regulator in its defined contribution code, which states that trust based schemes – including master trusts – have to disclose costs and charges (including transaction costs) relating to the default arrangement and all other funds in their chair statement.
According to rules introduced by the Department for Work and Pensions, this document, which needs to be produced every year, explains how the scheme meets certain governance standards, and must be made available on the scheme's website free of charge.
The discrepancy led experts to question the split approach. While some argued that the Pensions Regulator should avoid complexity and limit the information available, others have asked for the Financial Conduct Authority to impose more transparency.
DWP asked to amend legislation
Kate Smith, head of pensions at Aegon, noted that the FCA’s new rules on publishing and disclosing costs and charges broadly mirror the DWP’s rules for trust-based schemes, which were implemented almost two years ago.
However, she said: “The FCA has given more clarity on how they expect this information to be included in IGC chairs' annual statement compared to the DWP’s guidance for trustees, which is useful.”
She said: “One major difference is that the FCA, presumably learning from the trustees’ chairs' annual statement, instead of including the costs and charges for all the funds members can select in chair’s statement, this will be limited to default funds only.
“Costs and charges for self-select funds can be accessed via web links. We would welcome the DWP amending its guidance to allow for a similar approach.”
TPR declined to comment on this matter as legislation is set by the DWP, which has been approached to comment.
Darren Philp, director of policy and communications at Smart Pension, agreed with Ms Smith.
He said: “We need to think from a member's perspective. While it is important this information is available, with chair statements being ridiculously long and complicated, the more information you can have online, or signpost to, the better.
“Taking a step back and thinking about the length of the chair statement, what its original purpose was for – which was meant to be a member-facing document – this is something the regulator and the DWP should consider doing.”
Contract-based schemes have wide range of funds
One of the arguments used by providers against publishing a full list of costs and charges for all its funds is that contract-based workplace schemes frequently offer a much wider range of investment funds/options than trust-based workplace schemes.
Most argued that this would pose significant practical challenges in making the necessary changes to their IT systems to meet the FCA’s timetable, often observing that most scheme members are invested in default options, the policy document stated.
Mr Philp noted that this is an issue, as most master trusts have a smaller number of self-select funds, while a contract-based provider could have hundreds of funds.
However, he argued that within an auto-enrolment master trust, more than 99 per cent of members would typically be in enrolled in the default fund.
“Let's focus the communication in a very simple way that is going to be of real benefit for that member. Cost and charges are important, and there needs to be transparency around that, but why should we risk confusing people? I think there is where we got to with the chair statement at the moment.”
Savers need full disclosure
On the other side of the fence is consolidator PensionsBee, which is asking the FCA to reconsider its misalignment with DWP.
“Savers need full disclosure of all products they are in, but most importantly the legacy and potentially high-charging, self-select ones,” said Clare Reilly, head of corporate development at the company.
She added: “As any saver who has tried to find their fees via web links knows, you are soon lost in a quagmire of confusing and nonsensical data.
“Costs and charges for self-select funds can be both extremely expensive and complex – it’s not uncommon to see 2 per cent as a total cost figure.
Providers divided on mandatory simpler annual statements
Workplace providers such as Smart Pension and PensionBee are supporting the government’s intention to introduce a standardised annual statement, with calls for legislation if take-up from schemes does not increase.
“Consumers could have mistakenly gone into a high-charging fund by accident and be clueless as to the impact fees are having on their pot. It’s these very consumers that need to be protected by disclosure, not those in the default.”
Ms Reilly also argued that the non-disclosure of fees prevents the development of comparison tools for pensions.
“If providers continue to obfuscate fees through web links, then UK savers stand little chance of ever being able to meaningfully compare their pensions nor understand which are giving them value for money,” she concluded.
