Pressure for transparency builds as City watchdog loads on demands

The new rules build upon the Department for Work and Pensions' response to its 'Better workplace pensions: Putting savers’ interests first' consultation, and provide a practical methodology for the implementation of the 0.75 per cent default fund charge cap.

In conjunction with the introduction of independent governance committees for contract-based DC schemes, the cap will target better value for money for members and will apply to all auto-enrolment default funds from April 6. The FCA's rules will prevent schemes from doing the following after that date:

• paying or receiving consultancy charges;

• paying commission or other charges for advice not initiated by scheme members.

• using different charge levels for active and deferred members.

Industry experts said the rules did not offer any surprises and provided an appropriately flexible methodology to facilitate compliance over the coming months.

Tom Barton, partner at law firm Pinsent Masons, said: “Probably the most significant change is the assessment methodology used to determine charges over the course of the year and that’s in alignment with what the DWP has already allowed.”

In broad terms, the FCA and PRA aren’t intending to increase capital requirements for underwriting life expectancy risk – it will mean more work on the provider’s part

Tom Barton, Pinsent Masons

Barton also said providers might face more work to satisfy scheme-specific capital reserve requirements.

“The paper… says this will get assessed on a case-by-case basis but in broad terms, the FCA and PRA [Prudential Regulation Authority] aren’t intending to increase capital requirements for underwriting life expectancy risk,” said Barton. “It will mean more work on the provider’s part."

Mark Wood, chief executive at JLT Employee Benefits, said he thought competitive spirit in the industry had led people to launch new products in the market well below the charge cap.

He added: “We must make sure the focus on the charge doesn’t distract people from the quality of the investment performance."

Transaction charge disclosure

In conjunction with the DWP, the FCA also released a call for evidence on improving the reporting and disclosure of information about transaction costs in occupational and workplace personal pension schemes. 

The two regulators are seeking advice from the industry on how to deliver transparency on transaction charges in the management of pension funds.

The industry will respond to issues around:

• what costs should be included in transaction costs reporting;

• the basis on which costs should be captured and reported;

• when, how and in what format information should be provided, and to whom.

Helen Powell, professional support lawyer at law firm Allen & Overy, said she thought it would be difficult to provide trustees with a figure for transaction charges. 

“Clearly we’ve got to find a way of providing information, but transactions go through a whole chain. If an investment manager is using a blended fund they may not know what the costs are for arrangements within that,” said Powell.

Richard Butcher, managing director at independent trustee provider PTL, said: “We’ve got nothing substantive at the moment, no solid framework to work on; these things will emerge in due course, but we’re a long way from them yet."

Last week the government also published a consultation following up on the Law Commission’s report on stewardship and ethical investment. 

Powell added: “Transaction costs are just part of a very broad question about how much trustees and providers are going to be required to disclose about investments they hold."