Workplace pension providers will no longer have disclose to members full fees — including transaction costs — for all fund options, after the industry lobbied the regulator for a change in these rules.
The Financial Conduct Authority has published an amendment stating that workplace pension providers, trustees and IGCs will only be require to disclose fees and charges initially on default fund options.
Previously it had said this fee disclosure would apply to all funds. However this was dropped after consultation with the industry. The FCA said there were concerns that would mean a “huge number of illustrations” would be generated which may be of “questionable benefit” for scheme members.
Schemes will initially only have to to disclose full costs and charges for default options and funds, with this increasing to a representative sample of funds options that members are able to select. However they will still have to show the compounding effect of aggregated costs and charges.
In this policy statement (PS20/2) the FCA also clarified a number of other concerns on how asset managers must calculate transaction costs to ensure potentially misleading information is not given to members. This included showing potentially negative transaction costs.
The policy statement confirms that all scheme members must get an annual communication which includes a brief description of the most recent costs and charges information available and how it can be accessed. This information should be made available, on request to members’ spouses and civil partners
Schemes should also publish this information free of charge on a publicly available website. This information should be updated annually within seven months of the end of each scheme year.
These new rules will be effective from April 2020.
Aegon’s pension director Steven Cameron says: “While the FCA has a duty to require cost and charges disclosure, it is far from clear how many members will take an interest in these new disclosures. With this in mind, it seems reasonable to focus first on charges and costs within default funds.
“We also welcome confirmation that the IGC Chair’s report doesn’t need to list costs and charges for every fund which could have led to very lengthy and unwieldy reports. For the same reason, we’re pleased that rather than having to disclose the compounding effect of costs and charges for every possible fund option, that a representative range can be provided.”
However he added Aegon remains concerned that there is a risk some members could misinterpret transaction cost information unless the clear distinctions between these and scheme charges are made clear. He points out that higher transaction costs can lead to better investment returns and better member outcomes.
Hymans Robertson partner Rona Train adds: “In the short term, providers will only have to publish costs and charges information on default arrangements, rather than full fund ranges.
“With this, the FCA is focussing on the importance of charges to those who (generally) do not make an active decision where to invest their pension assets.
“This seems logical and will cover the vast majority of members in DC arrangements. The assumption is that, for those self-selecting, they will have made an active decision, based on a number of different criteria including charges, where their money is invested.
“Whilst this may be the case, in reality, many members will not have based their decisions on full knowledge of costs and charges.”
She adds: “It’s a delicate balance for the FCA of requiring providers to produce the information that’s relevant to the majority of DC members and giving potentially hundreds of pages of information which members will generally find impenetrable.”
This latest FCA policy statement follows on from rules introduced last year which required asset managers to report transaction costs and other charges to operators, trustees or manages of workplace pension schemes. As part of this initiative the FCA set up the Institutional Disclosure Working group in 2018 — led by Dr Chris Sier — to agree templates for cost disclosure by asset managers to pension schemes and other institutional investors.
The FCA is also consulting this year on clearer and simpler charge disclosure for members of non-workplace pension schemes.