New requirement on trustees to report net investment return (relevant for most schemes providing DC benefits)

The new requirement, which is intended to help members understand how their investments are performing, is part of the Government's wider policy objective to improve outcomes for members of DC schemes. This is a continuing priority area for the Government, largely driven by the increasing number of individuals saving into DC arrangements due to automatic enrolment.  The output from the new reporting requirements will also provide the necessary data for the value for member assessment which smaller schemes are now required to undertake.

• Which schemes are in scope?  Trustees of all occupational pension schemes providing defined contribution benefits, regardless of asset size.  Only very limited exceptions apply. Defined contribution benefits do not include AVCs for the purposes of this requirement and so trustees of schemes where the only DC benefits provided are AVCs will not be impacted. 
• What is required?  Trustees must, as part of their annual chair's statement, state the return on investments from their default and self-select funds, net of transaction costs and charges. The definition of a self-select fund is wide and will capture all funds which scheme members are, or have been able to select in the past, and in which scheme members are invested during the scheme year.  Net investment returns refers to the returns on funds minus all transaction costs and charges. The information must also be published on a publicly accessible website.  Trustees must have regard to relevant statutory guidance when complying with the requirements.
• Which guidance is relevant?  Trustees will need to refer to new statutory guidance issued by the Department for Work and Pensions (DWP) on completing the annual value for members’ assessment and reporting of net investment returns (dated 21 July 2021).  This includes detailed guidance on the data and format which the DWP expects to be included as part of the net investment return calculation.  In addition, trustees will need to have regard to the updated statutory guidance on the reporting of costs, charges and other information.  This will be relevant when complying with the necessary disclosure requirements associated with the net investment return calculations, including what is expected in relation to disclosure on a publically accessible website.  Trustees may also wish to refer to the Pension Regulator's guidance for trustees when completing their chair's statement - the Regulator's guidance is not mandatory, but does provide a full checklist of points that trustees will need to cover in their chair's statement, including the new requirements. 
• When do trustees have to comply?  Information on net investment returns must be stated in the annual chair's statement for the first scheme year that that ends after 1 October 2021 and annually thereafter. 
• What are the key action points for trustees?   Trustees should liaise with their investment consultant so that they can make the necessary disclosures by the deadline.  Trustees will also need to ensure that they will be able to publish the information on a publically accessible website.
• What is the penalty for non-compliance?   The Regulator has a number of enforcement options, including the imposition of a (mandatory) financial penalty of between GPB 500-2,000 if the Regulator concludes that a chair's statement is not compliant with the legislation.  The strict approach adopted by the Regulator has come in for criticism but remains the approach currently and is an additional reason why trustees need to take care to ensure that they comply with the new requirement when preparing their chair's statement. 

The new statutory guidance on completing the annual value for members’ assessment and reporting of net investment returns can be viewed here.

The updated statutory guidance issued by the DWP on costs and charges can be viewed here.

The Pension Regulator's Quick Guide to the Chair's Statement can be viewed here. 

New requirements on trustees to undertake detailed value for member assessment (relevant for smaller schemes providing DC benefits)

The new requirement has been introduced following various consultations since 2019.   The Government believes that consolidation is the most effective way to ensure that all savers are receiving the best value from well governed schemes that can achieve economies of scale. It also considers that consolidation will deliver more opportunities for members to access a more diverse range of investment products and investment strategies to the benefit of both pension schemes members and the broader economy. The Government has initially focussed the new requirement on smaller schemes in order to encourage consolidation.  Trustees of larger schemes should be aware that this is phase one of a bigger project to drive consolidation in the DC market more generally and expect further developments in this area as the Government's policy develops. 

• Which schemes are in scope?  Trustees of schemes which have net assets of under GBP 100 million and which have been in operation for 3 years or more.  Trustees of schemes will assets over GBP 100 million will not need to comply with the new requirement.  They will, however, need to continue to assess and explain in the annual chair's statement how costs and charges of their scheme generally represent value for members.  Whilst the number of schemes impacted by the new requirement is limited to smaller schemes for now, trustees of larger schemes should note that the Government has indicated its intention to drive consolidation in the DC market more generally.
• What is required?  Trustees must carry out a detailed assessment of how their scheme delivers value for members, including comparison against three other schemes, plus an assessment of scheme governance against a list of (quite extensive) criteria. They must explain the results of any assessment  in the annual chair's statement and must also publish the information on a publicly available website.  In addition, trustees must also make additional declarations to the Pensions Regulator, as part of the annual scheme return. If trustees conclude that their scheme is not providing value for members, they must state whether they are proposing to transfer benefits to an alternative scheme and if not, why not.   
• When do trustees have to comply?  Trustees must comply with the new requirement in relation to the first scheme year ending after 31 December 2021.
• What are the key action points for trustees?  Trustees of schemes which are near the GBP 100 million threshold should establish whether or not they are in scope of the new requirements, ensuring that the assets which are being used for these purposes meet the relevant definitions in the legislation.  If trustees' schemes are in scope, they will need to factor in sufficient time to gather the necessary information to complete the assessments. They will also need to ensure that they comply with the reporting duties in the chair's statement and the annual return.   Trustees will need to take into account the relevant statutory guidance - this is the same guidance referred to in the previous heading on reporting on investment returns. 
• What further developments can trustees expect in this area? The Government has made clear that the new requirement on smaller schemes to conduct value for member assessments is step one of a bigger project to drive consolidation in the wider DC market "further and faster", and in June 2021 the Government published a call for evidence aimed at identifying ways to incentivise consolidation for schemes with GBP 100 million to GBP 5 billion in assets (and in the foreword to the call for evidence the Government said that it did "not intend to stop at GBP 5 billion"). 

Other changes from 1 October 2021

In addition to introducing the requirements covered above, the Occupational Pension Schemes (Administration, Investment, Charges and Governance) (Amendment) Regulations 2021 also made certain changes to the costs and charges regime (which, broadly, is relevant for the default arrangements for DC schemes used as qualifying schemes for automatic enrolment), including changes to allow the smoothing of performance fees. Trustees should ensure that they are taking into account the updated requirements when calculating and disclosing costs and charges, and that they are referring to the up to date statutory guidance in this area.