Out-Law News 2 min. read

Pension scheme transaction costs disclosure requirements confirmed


New rules requiring disclosure of pension scheme investment costs will come into force in April, the government has confirmed.

Defined contribution (DC) pension scheme trustees will be required to publish charge and transaction cost information for all investment options in the chair's statement and on a publicly-available website, the address of which must be provided to scheme members in their benefit statements. Disclosure must also include an illustration of the compounding effect of the costs and charges.

Newly-published regulations come into force on 6 April 2018. Schemes will have until seven months after the first scheme year ending on or after this date to comply.

Both the chair's statement and the online version of the disclosure must set out the costs and charges for each of the scheme's default arrangements, and for each alternative fund option, according to the government's response to last year's consultation on its proposals.

Trustees will also be required to disclose the same information in respect of pooled fund investments, but only in response to a direct request from a scheme member or recognised trade union. The regulations give them two months to respond to such a request. This requirement comes into force on 6 April 2019.

The new requirements will apply to the majority of occupational pension schemes providing DC benefits with limited exceptions, for example if the only DC benefits provided by the scheme are AVCs.

Transaction costs are the costs that result from the trading necessary to invest the assets paid into a pension scheme and can include commission paid to brokers, bank transaction charges and stamp duty paid when a fund manager uses a pension pot to buy or sell shares. Since April 2014, DC trustees have been required to take these costs into account as part of their annual scheme value for money assessments, and to report on their findings as part of the chair of trustee's annual statement.

Pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, said that the new requirements would improve transparency in relation to these costs for scheme members.

"Given very strict standards of compliance around chair's statements, it's important to pay very close attention to the new requirements," he said. "That compliance starts with getting hold of the right information from fund managers, since only then can trustees make due disclosure."

"The reporting and disclosure requirements are generally designed to help members to understand the relative merits of different investment options in a DC scheme. This may help with engagement, and support good decision-making over time," he said.

New Financial Conduct Authority (FCA) rules requiring fund managers to respond to requests for transaction costs from pension scheme trustees came into force on 3 January 2018. The rules require fund managers to provide this information in a standardised form using the 'slippage cost' methodology, which calculates transaction costs as the difference between the price at which the transaction was actually executed and the price when the order to make that transaction entered the market.

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