Consultation outcome

Review of the Default Fund Charge Cap and Standardised Cost Disclosure

Updated 13 January 2021

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Introduction

The government is committed to ensuring that individuals who are automatically enrolled into a pension scheme are protected from high and unfair charges and are saving into schemes that are well run. This is why the government introduced a charge cap of 0.75% of funds under management, or an equivalent combination charge, in respect of the default arrangements of workplace pension schemes used for automatic enrolment from April 2015.

The charge cap has been an important factor in driving down member-borne costs and effective in improving the value for money of DC workplace pension schemes. Over 10 million pension scheme members in default arrangements have benefited from the protection against inappropriate charges.

We have committed to review the charge cap this year and this call for evidence together with a Pension Charges Survey, will inform future decisions. We will review whether the level of the charge cap should change; the extent to which transaction costs and other costs associated with life assurance products should be included in the cap; fees structures and in particular, how members subject to charging structures which include a flat fee element are protected from excessive charges; and consider options for assessing existing take-up, and widening the use, of standardised cost disclosure templates when calculating and evaluating pension charges.

We aim to bring forward proposals in response to this call for evidence later this year.

About this call for evidence

Who this call for evidence is aimed at

  • pension scheme trustees
  • pension scheme service providers, other industry bodies and professionals
  • civil society organisations
  • pension scheme members and beneficiaries
  • any other interested stakeholders

Purpose of the call for evidence

This call for evidence is seeking views on the effectiveness of costs, charges and transparency measures in protecting pension member outcomes.

The document progresses the commitment made by government following the 2017 review of the charge cap to re-examine the scope and level of the charge cap in 2020, and to review permitted charging structures.

This call for evidence seeks views and evidence on the following:

  • the level and scope of the charge cap applicable to the default arrangement within certain Defined Contribution (DC) pension schemes used for Automatic Enrolment (AE)
  • the appropriateness of permitted charging structures and the extent to which they should be limited
  • options to assess take-up, and widen the use of standardised cost disclosure templates

Scope of call for evidence

Pensions policy is a reserved matter in Scotland and Wales. This call for evidence, therefore, applies to England, Wales and Scotland.

Duration of the call for evidence

The call for evidence period begins on 25 June 2020 and runs until 20 August 2020. Please ensure your response reaches us by that date as any replies received later may not be taken into account.

How to respond to this call for evidence

Please complete the online questionnaire which accompanies this call for evidence.

Alternatively, if you wish to submit information which cannot be provided via a web form, please send your consultation responses to:

Email: pensions.charges@dwp.gov.uk

Electronic responses are preferred unless there is a clear reason not to do so. In this instance, respondents should write to:

Madaliso Zgambo
Department for Work and Pensions
Policy Group
Private Pensions and Arm’s Length Bodies Directorate
Third Floor South
Quarry House
Leeds
LS2 7UA

When responding, please state whether you are responding as an individual or representing the views of an organisation.

Government response

We will publish the findings of this call for evidence as part of the charges review by the end of 2020. We will aim to publish the summarised responses on the GOV.UK website.

How we consult

Feedback on the call for evidence process

We value your feedback on how well we consult or seek evidence. If you have any comments on the process of this call for evidence (as opposed to comments about the issues which are the subject of the call for evidence), please address them to:

DWP Consultation Co-ordinator
4th Floor
Caxton House
Tothill Street
London
SW1H 9NA

Email: caxtonhouse.legislation@dwp.gov.uk

Freedom of information

The information you send us may need to be passed to colleagues within the Department for Work and Pensions (DWP), published in a summary of responses received and referred to in the published consultation report.

All information contained in your response, including personal information, may be subject to publication or disclosure if requested under the Freedom of Information Act 2000. By providing personal information for the purposes of the public consultation exercise, it is understood that you consent to its disclosure and publication. If this is not the case, you should limit any personal information provided, or remove it completely. If you want the information in your response to the consultation to be kept confidential, you should explain why as part of your response, although we cannot guarantee to do this.

To find out more about the general principles of Freedom of Information and how it is applied within DWP, please contact the Central Freedom of Information team: freedom-of-information-request@dwp.gov.uk.

The Central Freedom of Information team cannot advise on a specific consultation exercises, only on Freedom of Information issues. Read more information about The Freedom of Information Act.

Chapter 1: The charge cap

Why we introduced the Charge Cap

1. In September 2013, the then Office of Fair Trading (OFT) published a market study of workplace defined contribution pensions[footnote 1]. This found that competition alone cannot be relied upon to drive value for money for all savers and made a number of recommendations, including the case for improving transparency of costs and charges in workplace pension schemes.

2. The government consulted in October 2013 on a package of measures[footnote 2] to protect automatically enrolled members. In its March 2014 Command paper[footnote 3], the government announced it would be introducing a range of charge control measures and improved governance standards from April 2015. These included:

  • a charge cap of 0.75 per cent on administration charges in the default funds of DC workplace pension schemes used for automatic enrolment
  • restrictions on permitted charge structures for members invested in the default fund
  • improved governance measures for occupational pension schemes including a requirement that trustees of relevant schemes assess scheme costs and charges each year to determine whether they represent value for money
  • a ban on Active Member Discounts so that the charge taken from a non-contributing member’s pot may be no higher than it would be if the member were contributing
  • a ban on member-borne commission payments to advisers

3. Following a consultation on draft regulations in October 2014[footnote 4], the government published its response in February 2015[footnote 5] and introduced regulations relating to occupational pensions schemes from 6 April 2015[footnote 6].

4. The Financial Conduct Authority (FCA) published corresponding rules to control charges and introduce Independent Governance Committees for workplace personal pension schemes from the same date. DWP’s and the FCA’s measures were implemented in stages from April 2015.

Scope of the Cap

5. The charge cap applies solely to the default fund of defined contribution schemes used for AE (excluding certain schemes, such as schemes with only one member) and covers all member-borne administration charges associated with scheme and investment administration, excluding transaction costs and a small number of other specified costs and charges.

6. The charge cap does not apply to members who make an active choice to select a different fund. It is assumed that members who have made an active choice will have done so with awareness of the fund’s particular characteristics, including its charge structure. The cap applies to the default arrangement where the majority of automatically enrolled members are invested. This covers those members who have been “defaulted” into that arrangement when enrolled by their employer[footnote 7].

Permitted charging structures

7. Only 3 types of charging structure may be used in the default arrangements of qualifying schemes. These are subject to different but broadly equivalent charge limits:

a) a single percentage charge, capped at 0.75 per cent of funds under management annually

b) a combination of a percentage charge on each contribution plus an annual percentage charge of funds under management

c) a combination of an annual flat fee plus an annual percentage of funds under management charge

8. These charge limits apply at member level – each relevant member must not be subject to a charge in excess of the limits above in any year they are a member of a relevant pension scheme.

Review of the charge cap

9. In 2017, the government carried out an examination of the level and scope of the charge cap to ensure that members continued to receive value for money for the charges and costs they paid for the administration, investment and governance of their pensions. We considered views from a range of industry and consumer representatives, as well as findings from the 2016 Pension Charges Survey[footnote 8] which captured data from providers covering 15.4 million pension pots across 228,000 employers.

10. The 2016 Pension Charges Survey found that charges were well below the level of the cap, with average charges between 0.38 and 0.54%[footnote 9], depending on the scheme type. We concluded that the charge cap was operating as intended, and confirmed the government’s intention to leave the scope and level of the charge cap at the level it was set. The government committed to review the level and scope of the charge cap again in 2020[footnote 10].

11. The 2020 Charges Survey will capture the full range of charges that are applied to qualifying schemes, including transaction costs, costs of any life insurance products or charges paid by employers .

12. To provide insight into the developing occupational pension scheme decumulation market, we will also survey decumulation charges for both the member and the employer applied to those drawing down from their pension.

13. Alongside this call for evidence, the survey will inform the review of the charge cap and provide the best possible evidence to assess whether the downward trend in charges has continued and whether any changes are needed to protect scheme members. The responses from this call for evidence will be used to evaluate the impact of charges measures and allow the government to assess whether it is achieving the difficult balance between minimising industry burdens, protecting scheme member interests and enabling long-term capital allocation.

14. We will engage with industry and other interested stakeholders both formally and informally throughout the review. We will set out our findings by the end of 2020.

Bringing life assurance products into scope of the cap

15. Charges borne by scheme members in default arrangements should be fair and only relate to services that add value to their pension saving. As part of the government’s commitment to protecting scheme member outcomes, we are considering whether to bring costs solely associated with the provision of non-standard add-ons such as life assurance into the scope of the charge cap. This would apply where a scheme member has been defaulted into paying for additional services and is unable to opt out.

16. We recognise that these arrangements are rare and there might be cases where the enhanced features can improve the member journey. However, we are particularly concerned about the following:

  • the appropriateness of defaulting people into products they may not need or want
  • the detriment to member outcomes if the price of add-ons drifts upwards without a backstop
  • the transparency of non-standard add-on costs

17. Our proposal is therefore to bring charges associated with life assurance products into the scope of the cap. If members are defaulted into such products the costs incurred will count towards the charge cap.

18. We will give further consideration to the measures outlined once we have gathered evidence, through this call for evidence and the 2020 Charges Survey.

Chapter 2: Including transaction costs within the charge cap

What are transaction costs

19. Transaction costs are the variable trading costs that a pension scheme incurs as a result of buying, selling, lending and borrowing investments. These costs cover a range of charges outside the default charge cap which can impact significantly on the value of a pension fund over its life cycle, regardless of the size of the scheme.

20. Transaction costs can be split into 2 broad categories: explicit and implicit costs. Stamp duty and dealing commission each time a stock is bought or sold are examples of explicit transaction costs. Implicit costs are those that are taken as part of the transaction price and might include losses or gains through the “bid-offer” spread on stocks. This is the margin that is made by market brokers when buying and sell equities, bonds and other holdings.

Why transaction costs were left out of scope

21. In October 2013, the government consulted on whether to include transaction costs in the scope of a default fund charge cap. The consultation explored how the governance and charges measures should be applied in occupational and workplace personal pension schemes[footnote 11].

22. The view of many respondents was that including transaction costs within the charges subject to a cap would restrict the ability of asset managers to trade. Some stakeholders highlighted that there was a lack of adequate transparency in the area of transaction costs to give any indication of what they amount to.

23. The government concluded in its response in March 2014 that transaction costs would initially be excluded from the default fund charge cap[footnote 12]. There was broad acknowledgment that the absence of standardised reporting procedures at the time had undermined efforts by pension providers, trustees and Independent Governance Committees (IGCs) to secure the information necessary to monitor and evaluate the value delivered by these costs. Alongside the FCA, the government set out a package of measures designed to introduce transparency of costs and charges in pension schemes from April 2015.

24. In 2017, the government’s examination of the charge cap again considered whether to cap transaction costs. The government concluded that it was not necessary at the time to bring transaction costs into the scope of the charge cap. This was to allow time for the FCA’s new rules on transparency, via a duty on asset managers to provide information on transaction costs to trustees and providers, to bed in first.

Why including transaction costs in the charge cap remains a challenge

Measuring transaction costs

25. Explicit transaction costs can generally be calculated accurately. However, there is no unarguable methodology for calculating implicit transaction costs. To obtain full transparency of all pensions costs a methodology is needed for calculating implicit transaction costs.

26. The FCA have settled on a measure of transaction cost reporting to capture these costs (commonly known as ‘slippage’), which the government supports. The alternative possible approaches that we have seen either tend to systematically underestimate the level of costs, or do not take account of the quality of execution of trades. This is because they do not reflect the price impact of dealing in large size, or because they use an assumed transaction cost, multiplied by the volume of turnover, which may not reflect the actual costs incurred.

Capping transaction costs

27. We recognise that transacting is a necessary part of pension investment provision. Unlike other costs, they are incurred in the interests of achieving a better return.

28. The transaction costs that a fund will incur depend on market conditions at the time when the manager transacts. It is possible that placing unreasonable restrictions on these costs could impact an asset manager’s ability to respond to changing market environments. Some industry stakeholders think that managing a fund with capped transaction costs will be difficult and complex in practice, without a clear benefit for consumers.

29. Capping transaction costs could incentivise asset managers to exclude fund strategies with inherently higher transaction costs, which may limit the proportion of such strategies which can be utilised within the default arrangement if it is to remain charge cap compliant. In other instances, managers could reduce the number of transactions they undertake, even when the trades would be in the best interests of scheme members.

30. There is some concern that transaction costs might be generated unreasonably by some asset managers. Some in the industry have also raised concerns that excessive costs may be shifted onto scheme members through an inflation of transaction costs, even where these costs do not qualify as such. Whilst this is possible, we have not seen any evidence of this in practice. This is largely because transaction costs tend to be relatively low. A recent study found that the majority of the total transaction costs fall within the range of -0.1% to +0.1%, with over 50% being negative[footnote 13].

31. We want to assess the effectiveness of any measures designed to improve disclosure of transaction costs before deciding whether a cap on these costs would be appropriate, and if so, at which level it should be set.

Questions

1. What are the advantages or disadvantages of extending the cover of the charge cap to include some or all transaction costs?

2. What would be the impact on scheme member returns/industry if some or all transaction costs were covered by the cap?

3. Should there be a combined transaction cost and charge cap, or should these be separate?

4. Who should be responsible for complying with a transaction cost cap?

Chapter 3: The level of the charge cap

Level of charges

32. The 2016 charges survey[footnote 14] found that the average member-borne charges in DC schemes were between 0.38% and 0.54%, depending on scheme type.

33. Members of contract-based schemes that are qualified for use in automatic enrolment (“qualifying schemes”) paid 0.54% on average; members of trust-based qualifying schemes paid 0.38% (bundled) and 0.42% (unbundled).

34. The average charge paid by scheme members in qualifying Master Trust schemes remained largely unchanged at 0.48%. Several providers were already comfortably below the cap prior to its introduction and so did not have to make changes in order to comply.

35. There are some providers who continue to charge near to or at 0.75% (the level of the cap). These are often but not exclusively smaller schemes that are less able to take advantage of the most competitive rates on the market.

36. Qualifying contract based schemes with fewer than 100 members typically paid between 0.65% and 0.72%. Qualifying trust based schemes with the same number of scheme members paid between 0.61% and 0.72%.

37. Non-qualifying contract-based scheme members paid 0.86% on average. Non-qualifying Master Trusts paid 0.65% and bundled and unbundled non-qualifying trust-based schemes paid 0.70% and 0.72% respectively.

38. In order to capture the full range of charges that are being applied to DC workplace pension schemes today, we will be gathering evidence from providers on the drivers of these costs in the upcoming charges survey.

The case for changing the charge cap

39. The government remains committed to protecting scheme member outcomes and ensuring the pension market works. We have taken measures to streamline the process of consolidation and made it easier for schemes unable to secure value for money in the long term to exit the market and secure a better deal for their members elsewhere[footnote 15][footnote 16]. We are also planning to consult on regulations to encourage smaller schemes to consider consolidation where this would offer better value to their members.

40. The default arrangements of many large, well governed pension schemes are already well within the cap and are growing at such a rate that they can negotiate competitive deals with investment managers and other service providers. This suggests that it is increasingly possible to deliver innovation as markets and instruments evolve and develop within the current charge cap. There is therefore potential for a lowering of the charge cap to further improve value for scheme members.

41. However, there may also be advantages to maintaining headroom between the average rate of charge and the cap. This may give scheme Trustees greater confidence in investing in wider range of asset classes, including those which are associated with variable fees, but which nonetheless could derive value for money for scheme members, without fear of inadvertently breaching the cap.

Challenges of lowering the charge cap

42. There is a risk that a significant reduction in the charge cap might discourage schemes from considering certain asset classes or force them to sell investments they already hold. This is because assets which are less easily traded, or require active management are likely to be more expensive than passive funds.

43. That is not to say that higher cost funds always guarantee better performance. There is mixed evidence that higher cost providers consistently deliver higher performance, net of costs, beyond what could be achieved by passive indexing within a particular asset class. Some providers have predicted an increase in the use of passively managed funds as a means of maintaining a pension design that is profitable within the charge cap.

44. On the other hand, some industry stakeholders have raised concerns that the shift to passive strategies could impact on price discovery and market efficiency, and contribute to market volatility.

45. It is important that investors understand both the total cost of investing and the objectives of the fund or mandate they are investing in, so that they can choose the product that best meets their needs. government wants to encourage trustees to invest in a diverse range of asset classes, including illiquids such as property, infrastructure and venture capital to optimise returns for scheme members and to support the wider economy. For example, investment in growth equity could provide an important source of patient capital to support the growth of the UK’s most innovative firms, at the same time giving scheme members access to the potential benefits such asset classes can bring. We therefore need to consider whether lowering the charge cap could lead to undesirable consequences for schemes seeking to diversify their investment portfolios.

46. In February 2019 we launched our Investment Innovation and Future Consolidation consultation[footnote 17]. The consultation looked at the interaction between the charge cap, Illiquid investments and performance fees and proposed an additional method to give Trustees more flexibility to pay performance fees, to help remove any potential barrier to investing in asset classes that attract such fee structures. We will bring forward our response to that consultation with proposals to address this issue in the Autumn.

47. Any changes to the level of the charge cap would need to be considered alongside proposals to introduce flexibility in the operation of the charge cap compliance mechanism, and any other changes that may impact scheme investment strategy.

Questions

5. If we lowered the cap, what would be the impact on (a) scheme member outcomes (b) industry?

6. How have investment approaches altered as a result of the introduction of the cap? What changes have there been in asset allocation, management style (active, passive, factor based)?

7. Have schemes changed administrator or asset manager in response to the cap?

8. What links have you found between cost and performance?

9. How much notice should be given for any reduction in the cap?

Chapter 4: Use of combination charges

Background

48. Historically pension schemes have applied multiple combinations of charges. Commonly schemes would include a flat annual fee, a percentage charge on contributions and a percentage charge on the funds under management. Such charging structures largely died out with the introduction of stakeholder pensions in 2001, which imposed a single annual management charge (AMC).

49. The Office of Fair Trading’s DC workplace market study[footnote 18] concluded that combination charge structures made it very difficult for pension savers, employers and advisers to compare value for money. Individuals who are saving in schemes with combination charge structures will experience a range of charges depending on how long they save, when they start saving, their salary and their contribution level.

50. With the introduction of the automatic enrolment charge cap, the government limited the combination charging structures that can be used in respect of default arrangements of DC schemes used for automatic enrolment. There are only 2 permissible combination charging structures:

a) a percentage of funds under management combined with a contribution charge. Permissible combinations are shown in the table below:

Contribution percentage charge rate (%) Percentage of funds under management rate (%)
1 or lower 0.6
Higher than 1 but no higher than 2 0.5
Higher than 2 but no higher than 2.5 0.4

b) a percentage of funds under management charge combined with a flat annual fee. Permissible combinations are below:

Flat fee charge (£ per year) Percentage of funds under management rate (%)
10 or less 0.6
More than 10 but no more than 20 0.5
More than 20 but no more than 25 0.4

Impact of contribution charges on pension scheme members

51. A contribution charging structure typically offers a low annual management charge. Scheme members who contribute over a long period of time can benefit from competitive rates and get better retirement outcomes.

52. As charges are expressed as a percentage of the value of contributions, scheme members’ pots do not reduce to zero, including cases where they stop contributing to the fund. However, scheme members who save for a short time before drawing their pension or transferring out could pay a high fee.

Impact of flat fees on pension scheme members

53. We recognise that combination charging structures can improve competition by helping new providers enter the market, as it allows them to raise capital from member contributions more quickly. We also recognise that schemes with contribution or flat fee charging structures may benefit from reduced vulnerability to economic shocks, such as that experienced in the covid-19 emergency. Financial and operational resilience are important factors in the long term sustainability of pension schemes and therefore need to be factored into any future decisions on charging structures.

54. From a member perspective, a flat fee provides the greatest benefit to those with the largest funds and those who contribute over a number of years. As with the contribution charging structure, the AMC can typically be low.

55. However, for those who save for a short period of time with a scheme, combination structures with a flat fee can result in higher charges than would have resulted under a single charge structure. This is because a flat fee is levied on the pot each month irrespective of whether contributions continue to paid. Many of these savers could have the balance left in the fund charged out to zero before they reach retirement, even with a reliable annual investment return.

56. The Work and Pensions Select Committee (WPSC) considered this issue as part of their inquiry into Pension Costs and Transparency in 2018 to 2019. They criticised the regressive effect of flat fees on small pension pots and concluded that the government should consider preventing flat fee charging structures being applied to dormant (or deferred) pensions.

57. The government accepted the WPSC’s analysis, and committed to give particular consideration to whether restrictions to the use of this charge structure in some circumstances is necessary to protect pension scheme members.

58. We recognise that the flat fee structure in its present form does not provide adequate protection, particularly for low earners and other groups who have traditionally been excluded from pension saving. The government is committed to ensuring that the permitted charging structures offer sufficient protection to all members, irrespective of their employer and their choice of scheme.

59. We also accept there is an interplay with the issue of the growth of small dormant/deferred pots. This is the subject of considerable interest and debate within the pension industry. We will closely monitor the debate and all emerging research, alongside the findings of this call for evidence, and our own internal deliberations.

Possible options on the restriction of flat fees

Overview of measures

60. Whilst we recognise the additional challenges and risks the flat fee structure can present, there is a case for the value it delivers to some savers. A complete ban on the flat fee structure, even limited to dormant/deferred pots could therefore eliminate competition and push charges upwards, whilst restricting choice for employers. This could lead to poorer retirement outcomes for scheme members.

61. Our view, therefore, is not to ban flat fee structures but to consider incorporating new conditions intended to limit their application in circumstances where scheme members will lose out. To support this approach, we are considering measures which will set a minimum pot size before a flat fee can be charged.

62. For illustrative purposes, such a mechanism could mean, for example, that:

A fee of: Can’t be charged unless the pot is at least
£5 or less £100
More than £5 but equal to or less than £10 £200
More than £10 but equal to or less than £20 £400
More than £20 but less than or equal to £25 £500

How we arrived at this example

63. Guided by previous automatic enrolment analysis[footnote 19] and other data sources we modelled scenarios based on a hypothetical individual who makes no further contribution from the age of 22 until the State Pension age of 68. We tested the proportion of savings lost through flat-fee and funds under management (FUM) charging at varying allowable permutations. Based on this modelling, we developed a simple example of how such a policy could operate.

64. We broadly based the investment growth rate on the FCA’s prescribed projections for rate of return[footnote 20], and estimated the average return experienced over a saving lifetime is 5.5% on the premise that most default investment strategies will be allocated in equities but will de-risk in less risky asset classes as retirement edges closer. We considered the eventuality of weaker returns and factored in sufficient margin to account for this in our assumptions.

65. There are a number of questions about how any such mechanism might apply, set out below. We will work with stakeholders on the detailed application of any measures taken forward following this call for evidence.

Questions

10. Do you agree with the suggestion to incorporate new conditions into flat fee structures? If not, what other ideas do you have to address the effect flat fees can have on small dormant/deferred pots?

11. Should any approach to limit flat fees apply for all scheme members with a pot below certain sizes, or only for deferred scheme members? At what level should the limit apply in each case?

12. Are you aware of any issues that would make it difficult to implement this kind of mechanism to limit flat fees, in particular, in relation to the broader issues around the desirability of consolidating small dormant/deferred pots?

13. What would be the impact on scheme members/industry?

Chapter 5: Standardised cost disclosure templates

Background

66. In November 2015, the FCA launched its market study into the UK asset management sector[footnote 21]. The study set out to assess the effectiveness of competition in the sector and found evidence of weak price competition. The study found that firms did not typically lower prices to win new business, and it also found high levels of profitability, with average profit margins of 36% for the firms that were sampled[footnote 22].

67. The study also highlighted that institutional investors found it difficult to obtain the necessary cost information from asset managers, in order to accurately compare costs across the market on a consistent basis. Inevitably, investors could not make informed value assessments and often paid higher charges which were not always justified by higher returns.

68. In response, the FCA convened the Institutional Disclosure Working Group (IDWG) in 2017, tasked with developing a standardised cost disclosure template for reporting of charges and transaction costs by asset managers to trustees and Independent Governance Committees (IGCs).

69. Whilst there are already duties to provide information about aggregate level charges and transaction costs, the IDWG aimed to create a framework for a standardised, more granular breakdown of costs to enable trustees to identify where costs are incurred, and to challenge, negotiate or switch as appropriate.

70. In June 2018, the IDWG agreed on a framework and provided a report to the FCA[footnote 23]. The IDWG recommended the formation of a successor body to curate, test and update the framework.

71. In November 2018, the Cost Transparency Initiative (CTI) was formed, supported by the Pensions and Lifetime Savings Association (PLSA), the Investment Association (IA) and the Local government Pension Scheme Advisory Board (LGPS SAB).

72. The CTI has since released industry-ready templates which can be used for the disclosure of costs and charges to institutional investors. In line with the IDWG recommendation, the use of the templates remains voluntary to both trustees and asset managers. The IDWG recommended[footnote 24] that rules should not be written by the FCA and that they should only consider doing so in certain circumstances. These include if adoption of the template is poor, or if institutional investors report difficulties in obtaining cost data to the level proposed in the templates from their providers – or if providers are found to have misrepresented data via the templates.

73. In their report into the pensions costs and transparency inquiry[footnote 25], the Work and Pensions Select Committee recommended that the government should mandate the use of the CTI disclosure templates for both DC and DB pension schemes. The government welcomed the recommendation and indicated that it was actively considering legislating to encourage or provide for them to be used.

74. We recognise that trustees, as the decision-makers of occupational pension schemes, would benefit from more detailed information on costs and charges, in view of their fiduciary duty to scheme members and, where applicable, their statutory duties to assess and report on the level of charges and the value they deliver for scheme members.

75. The more standardised and detailed the information which trustees are able to obtain, the better equipped they will be to pinpoint where costs are being incurred and to make detailed comparisons. That will allow them to drive continuous improvements in the value they deliver for scheme members.

Existing regulatory provisions

76. Pension scheme trustees have a fiduciary duty to act in members’ best interests, and knowing the charges being applied to them is a key part of this. Legislation requires trustees of relevant occupational pension schemes providing money purchase benefits to report costs and charges annually, and the value these represent, via the Chair’s Statement[footnote 26].

77. Similarly, under FCA rules[footnote 27] and the Markets in Financial Instruments Directive II (MiFID II), investment managers have a legal duty to calculate and disclose cost data at the client’s request. In February 2020, the FCA published final rules and guidance that will require onwards disclosure to members of workplace pension schemes regulated by the FCA[footnote 28].

Changes for consideration

78. This call for evidence explores policy options for increasing uptake of the CTI templates with the aim of encouraging their use as a standardised form of cost disclosure.

79. We welcome views on the relative merits and potential issues of mandating the use of CTI templates by trustees. We are seeking evidence as to whether such legislative intervention is required and the extent to which it would usefully accelerate the pace at which the templates are being adopted.

Voluntary disclosure

80. The IDWG proposed a voluntary disclosure regime, arguing that a market driven approach would be more effective in establishing and demonstrating a commitment to transparency and trustworthiness.

81. Early indicators of adoption have been positive. Ten of the UK’s largest pension schemes have publicly endorsed the CTI and have set out their support and intent to use the framework[footnote 29].

82. The signatory asset managers of the Local government Pension Scheme (LGPS), which represents a large proportion of the market, have also committed to adopt the CTI templates. It is reported that more than 100 asset managers have so far signed up to the LGPS Code of Transparency[footnote 30]. Existing signatories are expected to transition to the CTI templates over time, whilst new signatories are required to use the CTI templates with immediate effect[footnote 31].

83. Given that investment managers are willing and able to declare costs using the CTI templates, there is an expectation that more investors will begin to receive disclosure in this format on a consistent basis and voluntary disclosure could become the industry benchmark over time.

84. Investors and managers widely recognise that a holistic view of costs and charges for a given fund or mandate, which the CTI templates facilitate, is an essential prerequisite for assessing value across the entire value chain.

Risks of voluntary disclosure

85. Besides what has been reported anecdotally, the scale of take-up across the market is yet to be determined. Given that successful adoption has largely been dependent on the capability and willingness of investors, asset managers and intermediaries to adopt the templates; there is a risk that if the pressure to adopt the templates is weak, the motivation to make disclosure in the absence of a legal requirement will be limited.

86. A self-serving approach where managers are disinclined to disclose information particularly where performance has been poor and costs have been high, will do very little to improve investment decisions and deliver value for scheme members.

87. It is widely accepted that there is no absolute certainty that everyone will adopt the templates on a voluntary basis. Some industry participants and the WPSC have questioned whether this will only be possible with compulsory, rather than voluntary disclosure.

88. Although early indicators of voluntary adoption are positive, industry wide adoption is not expected for some time. The CTI Board is monitoring take up and conducted a survey in April 2020[footnote 32] which indicates that the pensions industry has responded well in this first year, with high levels of awareness of CTI and with the majority of those responding having used the CTI online tools and guidance. The CTI Board continues to work to make the CTI framework the industry standard and will continue to review progress towards this. However, in the absence of industry-wide data on the take up of the templates across the market, it is difficult to closely evaluate how many people are using these important standards.

89. We are unsure about the extent to which the voluntary approach will improve standardised disclosure of all costs right across the diverse occupational pension scheme market. We would like to collect more information about this.

90. The government has made clear that it would like to see use of the templates by all trustees and investment managers. We are giving consideration to the best way of achieving full take-up.

Legislate to require trustees to report via the scheme return

91. In order to assess the effectiveness of the voluntary approach we are considering whether to require trustees to submit information to the Pensions Regulator (TPR) disclosing whether they have requested and/or obtained cost and charge information on the CTI templates. We also suggest that this proposal would in itself increase take-up of the templates as trustees will need to report whether or not they have used them.

92. Trustees have a statutory duty to provide certain information to the Pensions Regulator (TPR) about their pension scheme, known as “registrable information”. We are considering including disclosure about the use of CTI templates to this registerable information.

93. We expect trustees and their advisers to be both asking for the data on the templates and carefully considering the results, so they can drive greater value for money for their members and their sponsors. Finding out the extent to which trustees are doing this across the market would inform whether and where progress is being made, and give us an idea of whether mandating the templates was ultimately necessary.

94. Given the scheme return is an established process that trustees are already familiar with, administrative burden on schemes would be low as schemes already have systems and processes in place for the existing reporting requirements.

Measures to require trustees to use the CTI templates

95. Some stakeholders have suggested that the only way to ensure that asset managers provide information in accordance with the framework published by the CTI would be to legislate that all trustees must calculate the charges and transaction costs incurred by scheme members using the templates. This would ensure a high level of take-up by all parties in the investment chain, and identify any remaining market barriers to adoption.

96. It is government’s intention that trustees should use the CTI templates to obtain information from investment managers. However, as set out in the government’s response[footnote 33] to the work and pensions select committee, we do not intend to penalise trustees for not using the statement at this stage.

97. Our preference is to encourage wider use of the CTI templates by legislating for disclosure via the scheme return before considering seeking any further powers to mandate their use. We are interested in further views.

Questions

14. Is legislative intervention required to support the uptake of the CTI templates?

15. How easy is it to request cost information from asset managers?

16. Do you believe that scheme members and recognised trade unions should have the right to request the information provided on the CTI template, and that a requirement to disclose this on request is proportionate?

17. Should DB schemes be required to adhere to the same standards?

18. What are the barriers to using the information obtained when making decisions?

Summary of Questions

Chapter 2: Potential changes to transaction costs

Q1. What are the advantages or disadvantages of extending the cover of the charge cap to include some or all transaction costs?

Q2. What would be the impact on scheme member returns/industry if some or all transaction costs were covered by the cap?

Q3. Should there be a combined transaction cost and charge cap, or should these be separate?

Q4. Who should be responsible for complying with a transaction cost cap?

Chapter 3: The level of the charge cap

Q5. If we lowered the cap, what would be the impact on (a) scheme member outcomes (b) industry?

Q6. How have investment approaches altered as a result of the introduction of the cap? What changes have there been in asset allocation, management style (active, passive, factor based)?

Q7. Have schemes changed administrator or asset manager in response to the cap?

Q8. What links have you found between cost and performance?

Q9. How much notice should be given for any reduction in the cap?

Chapter 4: Use of combination charges

Q10. Do you agree with the suggestion to incorporate new conditions into flat fee structures? If not, what other ideas do you have to address the effect flat fees can have on small dormant/deferred pots?

Q11. Should any approach to limit flat fees apply for all scheme members with a pot below certain sizes, or only for deferred scheme members? At what level should the limit apply in each case?

Q12. Are you aware of any issues that would make it difficult to implement this kind of mechanism to limit flat fees, in particular, in relation to the broader issues around the desirability of consolidating small dormant/deferred pots?

Q13. What would be the impact on scheme members/industry?

Chapter 5: Standardised cost disclosure templates

Q14. Is legislative intervention required to support the uptake of the CTI templates?

Q15. How easy is it to request cost information from asset managers?

Q16. Do you believe that scheme members and recognised trade unions should have the right to request the information provided on the CTI template, and that a requirement to disclose this on request is proportionate?

Q17. Should DB schemes be required to adhere to the same standards?

Q18. What are the barriers to using the information obtained when making decisions?

  1. Office of Fair Trading (2013) Defined contribution workplace pension market study. ↩

  2. Better Workplace Pensions: a consultation on charging, DWP, 2013 ↩

  3. Better workplace pensions: further measures for savers, DWP, 2014 ↩

  4. Better workplace pensions: Putting savers’ interests first, DWP, 2014 ↩

  5. Better workplace pensions: Putting savers’ interests first – government response, DWP, 2015 ↩

  6. Part 2 of The Occupational Pension Schemes (Charges and Governance) Regulations 2015 (SI 2015/879) ↩

  7. TPR DC trust: scheme return data 2019-20, Table 2.13 ↩

  8. Pension Charges Survey 2016: Charges in defined contribution pension schemes, DWP, 2016 ↩

  9. Pension Charges Survey 2016: Charges in defined contribution pension schemes, DWP, 2017 ↩

  10. Pensions: Written statement - HCWS249 ↩

  11. Better Workplace Pensions: a consultation on charging, DWP, 2013 ↩

  12. Better workplace pensions: further measures for savers, DWP, 2014 ↩

  13. LCP (August 2019) Investment Management Fees Survey, Investors are in the Driving Seat ↩

  14. Pension Charges Survey 2016: Charges in defined contribution pension schemes, DWP, 2017 ↩

  15. Simplifying the process for defined contribution pension scheme consolidation while maintaining member protection, DWP, 2018 ↩

  16. The Occupational Pension Schemes (Preservation of Benefit and Charges and Governance) (Amendment) Regulations 2018 ↩

  17. Investment Innovation and Future Consolidation, DWP, 2019 ↩

  18. Defined contribution workplace pension market study, Office of Fair Trading, 2013 ↩

  19. Better workplace pensions: a consultation on charging, DWP, 2017 ↩

  20. Rates of return for FCA prescribed projections, FCA, 2017 ↩

  21. Asset management market study Terms of Reference, FCA, 2015 ↩

  22. Asset Management Market Study, Final Report, FCA, 2017 ↩

  23. Institutional Disclosure Working Group (IDWG) Report to FCA ↩

  24. Institutional Disclosure Working Group report to FCA: Summary ↩

  25. 29th Report - Pension costs and transparency, HC 1476 ↩

  26. Regulation 23 of The Occupational Pension Schemes (Scheme Administration) Regulations 1996. There are certain schemes that are not relevant schemes for these purposes, for example a scheme which provides no money purchase benefits other than benefits which are attributable to additional voluntary contributions. Relevant schemes are defined in regulation 2 of the 1996 Regulations. ↩

  27. Transaction cost disclosure in workplace pensions, PS17/20 ↩

  28. Publishing and disclosing costs and charges to workplace pension scheme members, PS20/2 ↩

  29. Top pension schemes commit to Cost Transparency Initiative ↩

  30. Code of Transparency - Manager list ↩

  31. Code of Transparency - the Templates ↩

  32. PLSA member survey (April 2020) ↩

  33. Pension costs and transparency: government and Financial Conduct Authority Responses to the Committee’s Twenty-Ninth Report of Session 2017–19, HC 292 ↩

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