In April 2015 new statutory governance requirements were introduced in relation to occupational pension schemes providing money purchase benefits.  One of the requirements is that trustees must prepare an annual statement regarding governance ("Statement") signed by their chair. The deadline for producing the Statement means that this is an issue which trustees may currently be looking at for the first time, and in this Pensions Alert we provide an overview of the requirements.

Which schemes have to produce a Statement?

The requirement applies to occupational pension schemes which provide money purchase benefits. However, this is subject to exceptions, for example, for schemes where the only money purchase benefits provided are attributable to Additional Voluntary Contributions (AVCs), certain small schemes, executive pension schemes and certain public service schemes.  

What is the deadline for producing the Statement?

The Statement must be prepared within seven months of the end of each "scheme year".  A "scheme year" for these purposes means the year specified in any document comprising the scheme or, if none, a period of 12 months commencing on 1 April or on such date as the trustees select. This means that where the "default" scheme year of 1 April to 31 March applies, the first Statement will have to be produced by the end of October 2016.  (Whilst the scheme year in this case will have commenced on 1 April 2015, the Statement will only need to cover the period from 6 April 2015 when the statutory requirements came into force.) 

What should the Statement cover?

Essentially the Statement must explain how the new statutory governance requirements introduced for DC schemes in April 2015 have been met and also report on the requirement for trustee knowledge and understanding.  The Statement must therefore include the following.

  • The default arrangement: the latest statement of investment principles concerning the default arrangement; any review of the default strategy and performance of the default arrangement undertaken during the scheme year; and any changes made as a result (or, if no review was undertaken, the date of the last review).
  • Financial transactions: how the requirement to secure that core financial transactions (such as investment of contributions, transfers, and payments to members) are processed promptly and accurately has been met during the scheme year.
  • Charges and transaction costs: information about the level of charges and transaction costs applicable to the default arrangement and other funds in which assets relating to members are invested; information about transaction costs that the trustees have been unable to obtain and the steps that are being taken to obtain that information in the future; and an explanation of the trustees' assessment of the extent to which the charges and transaction costs represent good value for members.  
  • Trustee knowledge and understanding (TKU): how the TKU requirements have been met during the scheme year and how the combined knowledge and understanding of the trustees, together with the advice available to them, enables them properly to exercise their functions.    

Certain multi-employer schemes which are subject to additional governance requirements must also include some additional information in their Statements. This information relates to the requirements for the majority of trustees of such schemes to be non-affiliated and for arrangements to be in place to encourage members to let the trustees know their views on matters relating to the scheme.  

Has the Regulator published any guidance about the Statement?

The Regulator's updated draft DC code and its draft supporting 'how to' guidance contain some information about the Statement.  Some key points to note from these documents are set out below.  However, it should be borne in mind that the updated code and guidance are currently still in draft form and therefore may be subject to change before they are finalised (expected to be in July).

  • The Regulator expects the Statement to be written in such a way as to provide a meaningful narrative of how, and the extent to which, the governance standards have been complied with.  This means not only stating whether or not compliance has been achieved but including an explanation of the measures that have been taken to achieve compliance and how the trustees have reached the conclusion that they are compliant, bearing in mind that members are the target audience.
  • Trustees should ensure that anything they write in the Statement is backed up by documented evidence, although this evidence does not have to be appended to the Statement.
  • There is no set format or standard template that has to be used and the exact content of the Statement will depend on the individual scheme and the format should depend on what best suits the needs of the members.  However, the Regulator notes that various organisations have produced templates that trustees may wish to use as a starting point.  As well as looking at available templates, the Regulator also notes that trustees could look at Statements produced by other schemes and published online, and statements produced by Independent Governance Committees of providers of contract-based schemes given that there are some similarities in the requirements for trust-based and contract-based schemes.

As well as looking at the requirement to produce the Statement, the Regulator's draft code and guidance also contain information about the governance requirements themselves, for example, information about promptness and accuracy in relation to core financial transactions and an illustrative approach to assessing value for members.

Who has to sign the Statement?

The chair of trustees is responsible for signing the Statement.  However, the requirement to prepare the Statement applies to all trustees, and the Regulator's draft guidance notes that the trustee board as a whole needs to ensure that the relevant standards are met. 

The legislation was amended earlier this year to address the situation where the chair has ceased to hold office and not yet been replaced.  In this case, a person appointed by the trustees to act as the chair in the interim period can sign the Statement.

How should the Statement be made available to members?

The Statement must be included in the scheme's Annual Report. The Disclosure Regulations contain requirements for trustees to provide members and beneficiaries with a copy of the Annual Report on request. 

The Regulator's draft guidance also encourages trustees to publish the Statement and states that trustees might also consider including the Statement, or a summary of it, with the annual benefit statement.

What are the penalties for non-compliance?

Schemes must inform the Pensions Regulator whether the Statement has been produced via the scheme return. Where the trustees have indicated that they have failed to prepare the Statement, or the Regulator is of the opinion that they have failed to do so, the Regulator must impose a financial penalty of at least £500 but no more than £2,000. 

In March 2016 the Regulator published a consultation (which closed on 3 May) on its draft compliance and enforcement policy which includes a proposed mechanism for calculating the penalty. The proposed mechanism takes into account factors including the number of members, previous breaches and whether there is a professional trustee in place. 

Next steps

The Regulator's draft guidance states that trustees should take steps to ensure that they are complying with the DC governance standards well in advance of their Annual Report so that they are able to produce the Statement when required. It is therefore important for trustees of affected schemes to consider this requirement even if they are not yet in the process of preparing the Annual Report.