On 4 February 2015, the Government issued its response to the consultation on draft regulations which it published last October on governance and charges in occupational pension schemes, alongside its paper “Better Workplace Pensions: Putting Savers’ Interests First”. The Government’s consultation response covers both the draft regulations and the development of the policy towards scheme charges. For a summary of the Government’s response to its earlier consultation, please see our previous speedbrief here.
Subject to Parliamentary approval, it is intended that the new regulations will come into force on 6 April 2015. This speedbrief looks at the main new responsibilities of the Chair of trustees.
Following the introduction of auto-enrolment and the increase in savers contributing towards a retirement income, the Government is concerned that workplace pension schemes are well governed and wishes to place minimum standards on all schemes which provide money purchase benefits.
The Government proposed in March last year that trustees should be required to have a Chair of trustees, who would have particular responsibility to issue an annual statement about how the scheme has met minimum governance standards. Such statements will need to cover periods from 6 April 2015 onwards.
Having considered consultation responses, the Government has decided to legislate so that schemes must have a Chair of trustees. Occupational pension schemes which provide money purchase benefits (unless they fall within certain limited exceptions) will be required to appoint a new Chair of trustees when the new regulations come into force. However, there will be a three month transitional period for existing schemes to appoint a Chair. There will also be a similar three month period of grace if a Chair resigns, dies or is removed.
Schemes will be required to add the name of the Chair to the list of registrable information that must be provided to the Pensions Regulator. Pension schemes will also be required to update this information when the Chair is first appointed and where the Chair changes.
Main new responsibilities of the Chair of trustees
The main regulatory responsibility of the Chair of trustees, in addition to the responsibilities of scheme’s other trustees, will be to sign off the annual Chair’s statement in relation to governance.
The annual Chair’s statement will need to:
- include a statement of investment principles for the default investment arrangement, details of any review of the default strategy and the performance of the default arrangement as well as any changes resulting from such a review;
- describe whether financial transactions, relating to, for example, investment of contributions to the scheme, transfers of assets relating to members into and out of the scheme or payments from the scheme in respect of members have been processed promptly and accurately;
- state the level of charges and transaction costs applicable to the scheme’s default investment arrangements;
- state the range of the levels of charges and transaction costs applicable to all funds which are not part of the default arrangement and in which assets relating to members are invested during the scheme year;
- indicate any information about transaction costs which the trustees have been unable to obtain and explain what steps are being taken to obtain that information in the future;
- explain the trustees’ assessment of the extent to which the charges and transaction costs represent good value for members; and
- describe how the requirements for trustee knowledge and understanding have been met during the scheme year and explain how the combined knowledge and understanding of the trustees, together with the advice which is available to them, enables them properly to exercise their functions as trustees of the scheme.
The Chair’s statement must be produced within seven months of the end of the relevant scheme year. However, if the first Chair’s statement after 6 April 2015 would only cover a period of less than three months, the regulations provide that schemes can roll that period forward to the following year’s statement, which would then cover a period of more than 12 months. Therefore, if the scheme year ends on 30 April 2015, for example, the first Chair’s statement would be due within seven months of the scheme year ending 30 April 2016. Such statement would then cover the period 6 April 2015 to 30 April 2016.
The Chair’s statement must be included in the scheme’s annual report.
There would be a fine of £500 to £2,000, enforceable by the Pensions Regulator, for failure to comply with the Chair’s statement requirement.
The requirement for schemes to have a Chair of trustees is new. Not all schemes will currently have a permanently appointed Chair, so it would be appropriate for schemes to start thinking about suitable candidates at this stage.
The new statutory information requirements regarding the Chair’s statement will require the trustees to consider how their scheme is meeting its governance standards. This means that the trustees will need to think about the scheme’s administration charges, transaction costs incurred in connection with managing investments and whether their scheme offers value for money to members.
Finally, the regulations do not provide a template Chair’s statement which must be adopted. Therefore, each scheme will need to give consideration to the exact wording and approach which they will adopt when preparing the statement to be signed by the Chair each year