FCA to extend charges disclosure to contract-based pension schemes

Out-Law News | 01 Mar 2019 | 3:38 pm | 2 min. read

Proposed rules requiring independent governance committees (IGCs) of contract-based pension schemes to disclose costs and charges to scheme members have been published by the Financial Conduct Authority (FCA).

Its consultation, which closes on 28 May 2019, proposes a broadly similar reporting framework as that which already applies to trustees of occupational pension schemes, although there are some differences, according to pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com.

"Nearly six years on, we’re still seeing the effects of the OFT's market study into defined contribution (DC) workplace schemes," he said.

"In broad terms, this is just a case of bringing IGCs into line with trustees of occupational pension schemes. That means the provider will be obliged to hand over the data to the IGCs - and the IGCs will then need to make public their illustrations of how costs and charges impact returns over time," he said.

"Although this means the legal regime is tightening up a bit, this general principle and approach is nothing new. Basically, we're still at the stage where policymakers and regulators want to see the impact of transaction costs on DC pots - so they can consider whether anything more than disclosure is needed to help secure value for money and good outcomes," he said.

IGCs fulfil broadly the same role for members of contract-based workplace personal pension schemes as trustees perform in occupational pension schemes. They have a duty to act in the interests of the pension scheme members, independently of employers and providers, and are under an ongoing duty to assess the value for money of the scheme, on which they must report annually.

Since January 2018, fund managers have been required to provide information about pension scheme transaction costs, administration charges and appropriate contextual information to trustees and IGCs on request, in a standardised form. The idea is that having oversight of this information will assist IGCs in their value for money assessment. The FCA is now proposing that scheme governance bodies, including IGCs, will be required to pass this information on to scheme members, at least annually.

The FCA is proposing that scheme members must be provided with information about transaction costs and administration charges for each default arrangement and each alternative fund option that that member is able to select. This should include an illustration of the compounding effect of the aggregated costs and charges.

The FCA is not proposing a prescribed format for the communication. Governance bodies would be permitted to include appropriate contextual information, or to combine the communication with any other annual communication to members from the scheme operator, trustee or manager, provided that the format "does not obscure the purpose of the required information".

The biggest difference between the proposed rules and the regime already in place for trustees relates to the way that transaction costs should be calculated, according to Barton.

"In some cases, the transaction costs figures are negative," he said. "The FCA wants to make sure that any such instances are based on the straightforward application of the 'slippage costs' methodology rather than anything else."

The 'slippage cost' method of calculating transaction costs refers to the difference between the price at which a transaction was actually executed and the price when the order to make that transaction entered the market. Fund managers should already be using this methodology when calculating transaction costs.