Statement regarding DC governance
This is the Trustee’s statement regarding DC Governance as required under regulation 23 of the Occupational Pension Schemes (Scheme Administration) Regulations 1996, as amended (the ‘Regulations’).
The Scheme is primarily a defined benefit scheme, but holds a number of money purchase benefits. This statement sets out how the Scheme has met the governance standards required by legislation in respect of those money purchase benefits during the Scheme period ended 31 March 2019.
The money purchase benefits held in the Scheme arise from the historic payment of AVC contributions and the transfer of money purchase benefits from the Corah Pension and Life Assurance Plan. The money purchase benefits are held in 17 different investment arrangements. No further money purchase contributions are being paid to the Scheme. The Scheme is not being used as a qualifying scheme for automatic enrolment purposes.
The Trustee has a process in place to upload this statement to the Scheme’s website to ensure it is accessible to members. Members will be notified of this.
The Scheme has no default (investment) arrangements for the purposes of the Regulations and so the aspects of the Regulations applying to default arrangements are not dealt with in this statement.
Processing financial transactions
The Trustee has a duty to ensure that core financial transactions (including the transfer of member assets into and out of the Scheme, switches between investments and payments to and in respect of members) relating to the money purchase benefits are processed promptly and accurately.
Such transactions are undertaken on the Trustee’s behalf by the Scheme’s administrators: the Coats Pensions Office (CPO) and XPS. The Trustee has agreed service levels (SLs) with the administrators which cover all administration tasks including the accuracy and timeliness of the processing of financial transactions. The existing service levels were reviewed by the Trustee in June 2018 after the Scheme was set up and the Trustee is satisfied that they are within the market norms.
A key element of accuracy in processing financial transactions is data quality, and the Trustee reviewed the work carried out by the predecessor schemes to assess whether any additional work was required to improve the data quality of the Scheme. As a result of that review the Trustee commissioned a conditional data report from the administrators and is considering that report and any actions required as part of their ongoing commitment to review and improve data quality where possible.
The administrators are also responsible for ensuring that the transactions processed by the third party providers of the money purchase benefits are completed promptly and accurately and to report to the Trustee on any deficiencies in the service from these providers. The providers manage the switches for those arrangements where members can choose their own funds, no members have reported any issues with this process.
The key processes the administrators have in place to ensure that the SLs are met are;
• a task-logging system which is reviewed weekly for forthcoming workloads, with tasks allocated daily;
• daily review of bank balances;
• weekly reconciliation of bank balances;
• protocols to ensure each payment goes through an agreed multi-level review and sign off process (which varies by amount and administrator).
The Trustee’s Audit, Risk and Administration Committee (ARAC) review the administrators’ internal controls on behalf of the Board and the SLs and agreements in place. The administrators prepare quarterly administration reports which are reviewed by the ARAC, which include performance against SLs, highlight any issues or failure to meet the agreed service levels and provide reasons for and details of the resolution of any SL breaches (if applicable). As a result of the additional work required to consolidate the Scheme following its establishment in 2018 to receive the assets and liabilities of three existing pension schemes, including changes to the transfer value calculation methodology, the Trustee agreed the extension to some of the service levels for a short period whilst this work was underway. Following the completion of this extraordinary work the service levels have returned to the previously agreed timescales and the ARAC continues to monitor the reports quarterly to check ongoing compliance.
The ARAC further monitored core financial transactions during the year by considering member feedback (if any) including complaints.
Based on the above, the Trustee is satisfied that over the period covered by this statement:
• there have been no material administration errors in relation to processing core financial transactions; and
• all core financial transactions have been processed promptly and accurately.
The Trustee is also satisfied that there have been no material administration service issues during the period covered by this statement.
Member-borne charges and transaction costs
The Regulations require the Trustee to set out the charges and transaction costs incurred by members in this statement. The Trustee requested details of the charges and transaction costs from each of the providers of the 17 money purchase arrangements. Not all providers were able to confirm the transaction charges and costs.
The information which has been obtained by the Trustee is detailed below.
Former Coats Pension Plan members AVC funds held with Aviva:
Fund charges – Fund’s administration cost for the scheme.
Total Transaction Cost – The total annual fund transaction costs. This is the total of the ‘Buying and Selling’ costs and ‘Lending and Borrowing’ costs as described below:
• Where it is an internal fund, which is a fund managed to an investment mandate set by Aviva UK Insurance, these are the costs incurred in buying and selling units in the Aviva insured fund and the costs incurred by this fund in buying and selling its holdings.
• Where the Aviva insured fund invests in an external fund these are the annual costs incurred in buying and selling units in the underlying external fund and the annual costs incurred by the underlying fund in buying and selling its holdings.
• The annual costs incurred by either the Aviva insured fund and / or the underlying fund in lending and borrowing its holdings.
Former Staveley Industry Retirement Benefits Scheme members AVC funds held with Clerical Medical:
Fund charges – Fund’s administration cost for the scheme.
Total Transaction costs – This is the total transaction cost figure for the fund (i.e. for Buy & Sell transactions and Lending & Borrowing transactions).
Former Brunel Holdings Pension Scheme members AVC funds held with Legal and General:
No information was provided further to our request for details of the charges and transaction costs. Further information was requested and L&G confirmed on 11 July that information would follow (regarding the Equity fund only), however as the Statement goes to publication this has not been received.
The other 14 arrangements are conventional with-profits funds. Investors in with profits funds do not get to see the actual value of the underlying assets. The value of the underlying fund changes daily, but customers fund values grow by a steady rate, called the regular bonus rate, which is calculated annually. Whilst the fund value grows steadily with regular bonus, it may be lower or higher than the value of the underlying assets. The charges are applied to the underlying assets, which adds complexity when providing details of the charges applicable to the members’ funds.
The results of our enquiries to the providers of these with-profits funds is below:
Fund charges – Fund’s administration cost for the scheme.
Total Transaction costs – This is the total transaction cost figure for the fund (i.e. generally including buying and selling transactions and lending and borrowing transactions).
Where the Trustee has not been able to provide information in this statement about any of the costs and transaction costs for the money purchase funds, the Trustee has queried the information we have received with all the providers. In respect of the missing transaction costs information, we have been advised that the providers are reliant on the fund managers of the underlying funds (i.e. the investment funds that the money purchase funds invest into) reporting the transaction costs in order that they can complete the necessary calculations to confirm the relevant costs to us. The information from the underlying funds has not been provided due to the fund management industry having to introduce new systems and processes to produce these costs using the slippage methodology (which compares the values of assets immediately before and after a transaction has taken place) which is taking longer than expected. This is in line with our understanding of the wider industry position; although there has been significant industry activity around the measurement and disclosure of these charges, and the requirement is for the providers to disclose their transaction costs in line with the new regulations, the information being provided is not yet completely in line with the regulations.
The Trustee continues to liaise with the providers regarding the request for the missing charges and costs information, to be able to present more detailed information in future statements if possible. In particular, where the provider has not provided the information or not committed to provide the information, the Trustee is engaging with the provider to seek that commitment and the timescales for doing so. The Trustee Board will monitor the responses and escalate these requests within the provider if necessary.
When preparing this section of the statement the Trustee has taken account of statutory guidance.
Illustration of charges and transaction costs
The legislation requires the Trustee to provide an illustrative example of the cumulative effect over time of the application of the charges and transaction costs noted in the previous section, on the value of a member’s accrued rights to money purchase benefits. The following table sets out an illustration of the impact of charges and transaction costs on the projection of an example member’s pension savings. The funds used in the illustration are funds available under the Aviva AVC arrangement. The majority of members’ money purchase benefits are held in the Aviva AVC arrangement.
To best illustrate the potential effect on members’ money purchase benefits of the charges being applied, the Aviva funds with the lowest and highest charges are included, together with funds with a range of investment returns. In determining the example illustration, the Trustee analysed the Scheme’s money purchase benefits, taking into account the range of member fund sizes, the range of investment returns and costs and charges across the various money purchase arrangements and the range of the expected periods of Scheme membership and the time it will take members to reach the Scheme’s normal pension age.
Under each fund there are two columns. The first shows the projected pension values assuming no charges are taken. The second shows the projected pension values after costs and charges are taken.
• Starting pot size used is £0.
• Contributions are assumed to be paid £100 monthly increasing at 2.5% each year.
• The figures illustrate the pension pot value in “today’s money” which means that they take inflation into account by discounting values at 2.5% a year (i.e. essentially treating each pound as though it has 2.5% less purchasing power than it did the previous year).
• Transaction costs may not have been included where data was not made available to Aviva from the fund managers.
Value for members assessment
The Trustee is required to assess the extent to which the charges and transaction costs borne by members represent good value, taking into account the nature and needs of the members. In assessing value the Trustee has considered that value does not necessarily mean the lowest fee, and thus the quality of the other provisions was also considered:
Charges and investment governance – for those schemes where full disclosure was obtained, the costs borne by members are reasonable when compared to general charges in the market including the charges cap on default funds. It is difficult to compare transaction costs at the current time due to a lack of information in the market, but the Trustee will revisit this position when completing their next value for members assessment. As noted above, the Trustee is continuing to pursue the providers to obtain the missing information in the meantime. Members have (where appropriate) access to a range of investment choices and can switch investment funds. The Trustee monitors the performance of the investment funds relative to their benchmarks and is satisfied that the unitised (the non with-profits) funds are performing in line with expectations taking a long term view and making allowance for short term underperformance.
Administration – The administrators are responsible for ensuring that the transactions processed by the third party providers of the money purchase benefits are accurate and timely and to report on any issues. The Trustee reviews the administration services, services levels and processes in place for the administrators which therefore include the provision of the DC benefits. The Trustee is happy that there are robust processes and procedures for logging and reporting issues with third party providers in place which ensure that the administration is carried out efficiently, and that all transactions were carried out in a timely manner with no issues to report.
Scheme management and governance – the Trustee is committed to the Scheme and ensure that the administration and operation of the money purchase benefits is monitored and regularly reviewed by the ARAC;
Communications – the administrators have a communications schedule and comprehensive procedures in place to review communications from a technical and member experience point of view to ensure that member communications are clear, tailored and communicative. Members receive timely and appropriate information about their money purchase benefits.
The majority of money purchase benefits are AVC’s additional to the accrued DB Scheme pension, AVC’s are typically used to fund tax-free cash in conjunction with the DB pension. For those members whose accrued benefits are pure money purchase in nature, the Trustee provides and pays for a third party service to enable annuity purchase. The member-borne charges for the Scheme’s money purchase benefits relate to the investment services and some communication services. All other charges in relation to the money purchase benefits and the Scheme are borne by the Sponsoring Employer. Taking account of money purchase benefits under the Scheme and these services to our money purchase members relative to the costs incurred, the Trustee considers that, in general, the money purchase arrangements delivered good value for members for the period covered by this statement. The Trustee’s assessment has been limited:
• As the Trustee has not received information on the costs and charges applying for all of the money purchase arrangements.
• As value for members in respect of charges and transaction costs for with-profits funds cannot be easily assessed due to the structure of such funds and the incorporation of many costs in the annual bonus calculations. The Trustee has however acknowledged that due to the nature of with-profit funds it is not generally possible for the Trustee to improve the value of the funds.
The Trustee has taken account of the work by the previous Trustees for the three schemes which transferred their assets and liabilities to the Scheme in making this assessment. A review by a former scheme’s investment adviser was carried out, on 31 March 2017, into the DC funds under that Scheme. This included the Aviva AVC funds and the majority of the with-profits funds. That review concluded that the with-profits funds should not be reorganised, given the likely value implicit within the guaranteed rates of annuities that they provide.
The Trustee is considering the appropriate timescale for the next full review of the DC funds and will report further in the next statement.
The Trustee also notes the work being carried out on the Financial Conduct Authority on the fair treatment of with-profits customers and will keep this under review including any actions the FCA take forward which are relevant to the Scheme.
Trustee’s knowledge and understanding
The law requires the Trustee Board to possess, or have access to, sufficient knowledge and understanding to run the Scheme effectively.
The two professional independent Trustee firms on the Trustee Board, Independent Trustee Services Limited, and Capital Cranfield Pension Trustees Limited, each have experience of sitting on major DC schemes and therefore bring to the Scheme extensive understanding and experience of DC governance and best practice.
The Trustee Directors take our training and development responsibilities seriously and keep a record of the training completed by each member of the Board. The Trustee uses these logs to keep track of our reviews of Scheme documents and policies to ensure that each Trustee director has a good working knowledge of Scheme documents. The Trustee has implemented a plan to ensure that training requirements are reviewed annually to identify any gaps in the knowledge and understanding across the Board as a whole. The first such review will take place in November and will allow the Trustee to work with its professional advisers to fill in any gaps, either individual or collective.
Specific actions include:
• An induction process is in place for new Trustee directors covering the law relating to pensions and trusts, and the relevant principles relating to the funding and investment of occupational pension schemes. This includes completing the Pension Regulators Trustee Knowledge and Understanding toolkit and training with the Scheme’s actuarial and investment advisors.
• An annual training day will be held to ensure the Trustee Board is up to date on current pension issues, emerging regulation and governance best practice including DC.
• Throughout the year, the Trustee directors have access to various training and seminar events.
• Where appropriate, the Trustee’s professional advisers attend Trustee Board and sub-committee meetings supporting the Trustee in ensuring that it exercises its functions properly and advising on applicable laws, and funding and investment principles, as appropriate.
• Reference is made at Trustee Board and sub-committee meetings to relevant sections of the Scheme’s trust deed and rules, Statement of Investment Principles and Trustee policy documents (including CUKPS DC benefits principles) to maintain Trustee directors’ understanding of these documents.
The Trustee’s training logs include the following DC specific training:
As a result of the training activities which have been completed by the Trustee Directors individually and collectively as a Board, and taking into account the professional advice available to the Trustee, I am confident that the combined knowledge and understanding of the Board enables us to exercise properly our function as the Trustee of the Scheme.
The statement regarding DC governance was approved by the Trustee and signed on its behalf by:
Mr C Martin
Representative of Independent Trustee Services Limited
Date: 3rd September 2019