The Occupational Pension Scheme (Administration, Investment, Charges and Governance) (Amendment) Regulations 2021 (the 2021 Regulations) has introduced the following two new requirements for trustees and managers of relevant occupational pension schemes:
1- to calculate and state the return on investments from their default and self-selected funds, net of transaction costs and charges; and
2- to demonstrate that their schemes deliver value for members (VFM).
Both the statutory guidance (the Statutory Guidance) and the Pensions Regulator’s value for money guidance (the TPR VFM Guidance) offer a support to trustees and managers of relevant occupational pensions schemes dealing with these new requirements.
Reporting net investment returns
The 2021 Regulations require that, from 1 October 2021, trustees of all relevant pension schemes[1], no matter what their asset size is, are required to calculate and state the return on investments from their default and self-selected funds, net of transaction costs and charges.
The trustees must record this information in their annual chair’s statement and publish it on a publicly accessible website.
The aim of this requirement is to help members understand how their investments are performing.
The Statutory Guidance suggests how information could be displayed for different member age groups and different charging structures and includes useful examples.
VFM assessment
For each scheme year ending after 31 December 2021, trustees of relevant schemes with a total asset under £100 million (known as specified schemes), which have been operating for 3 or more years, must demonstrate that their schemes deliver VFM.
If they are unable to demonstrate this, they need to consider winding up their scheme and transferring their members to a different scheme that provides good value for members.
To demonstrate that their schemes deliver VFM, trustees of relevant schemes have to carry out an assessment which must involve a comparison against three other schemes.
We have set out below a road map to help the trustees of a specified scheme navigating through this new requirement.
[1] A ‘relevant scheme’ is defined by Regulation 1(2) of the Occupational Pension Schemes (Scheme Administration) Regulations 1996. This definition includes most schemes that provide money purchase benefits while excluding defined benefit schemes.
The three broad factors
When trustees of specified schemes complete the VFM assessment, they need to consider the:
• costs and charges assessed relatively, based on comparison with at least three other pension schemes;
• net investment returns assessed relatively, based on comparison with at least three other pension schemes; and
• administration and Governance assessed on an absolute basis within the pension scheme itself.
In accordance with the Statutory Guidance, for the purposes of assessing costs and charges and net investment returns, each specified scheme must compare itself with three “comparison schemes” which should be:
1- an occupational pension scheme which on the relevant date[2] has total assets of £100m or more; or
2- a personal pension scheme which is not investment regulated under the Finance Act 2004.
The 2021 Regulations also requires that trustees of specified schemes have had discussions with at least one of the comparator schemes about a potential transfer of the members’ rights if the specified scheme is wound up.
TPR publishes an updated list of authorised master trust schemes that trustees of specified schemes may want to consider when choosing comparison schemes. However, trustees are free to select their own comparison schemes.
Differently from the costs and charges and the net investment returns, the administration and governance assessment does not require a comparison.
However, for the VFM assessment, the Administration Regulations (as amended by the 2021 Regulations) lists the following 7 different key metrics that must be considered and assessed:
1. Promptness and accuracy of core financial transactions: trustee should have effective methods to control the risk of delays and inaccuracies in processing financial transactions and reconcile and rectify errors.
2. Quality of the records kept by the trustees or managers: trustee should have reliable, accurate, secure data and processes in place to review records in order to deliver value for scheme members.
3. Appropriateness of the default investment strategy: including the quality of decision making and governance in relation to the strategy.
4. Quality of investment governance: trustees have responsibility for securing the proper management of the scheme’s assets and good scheme investment governance.
5. Level of trustee knowledge and understanding and skills to operate the scheme effectively: to demonstrate compliance with the new requirement, trustees should include reference to (i) whether sufficient time is spent running the scheme, (ii) diversity of the trustee board, (iii) quality of leadership and effectiveness of board decision making (iv) trustee continuous learning and development and (v) quality of working relationship with employer and third parties.
6. Quality of communication with the members: trustees have to demonstrate their compliance with statutory obligations and explain the quality and timeliness of information in various areas.
7. Effectiveness of the management of any conflicts of interest: pensions scheme should have a conflict of interests policy and controls in place to ensure conflicts are correctly declared.
The Statutory Guidance is clear that, trustees of schemes that do not provide good VFM, need to look to wind up their schemes and transfer the rights of their members into a larger occupational pension scheme or personal pension scheme or set out an immediate action to make improvements to their schemes.
[2]A relevant date is the date on which the trustees obtained audited accounts for the scheme year that ended most recently.
How HPW can help you
The government’s expectation is that members should rely on a well-run scheme that delivers optimal VFM over the long term.
If this is not achievable, members should be expected to be transferred to a different scheme which can offer this optimal VFM.
HPW can help you in different ways.
Understanding the new requirements in this area
We can explain to you the background and the legislative requirements. We can make sure you understand your duties and comply with them.
Net investment returns & VFM assessment
We can guide you through all the requirements to complete your net investment returns and your VFM assessment and we can make sure this is done in the most efficient way.
Improvement or consolidation
If, after completing your VFM assessment, you believe that you are not able to offer VFM, we can help you set out an immediate action to make improvements to your scheme or, alternatively, winding up your scheme and transfer the rights of your members into a larger occupational pension scheme or personal pension scheme that can offer good VFM.
Please get in touch with us if you wish to discuss this further with us.