Defined contribution (DC) chair’s statements need a major re-think as part of the Department for Work and Pensions’ five-yearly statutory review on the rules around scheme governance in 2021, LCP says.
The consultant argued a single document could not achieve the twin objectives of providing information for members and giving The Pensions Regulator (TPR) the information needed to assess regulatory compliance.
It additionally said the statements were rarely viewed - going almost entirely unread by scheme members.
Under current rules, trustees of "relevant schemes" (broadly most schemes with non-AVC DC benefits, with some exceptions) have to provide a chair's statement each year, providing information on how their scheme meets certain governance standards. This includes information about a scheme's default option, the costs and charges applied and the assessment of value for members.
The regulator is obliged to issue a fine where the timing or content of the statement does not satisfy the rules, and in 2019 TPR even issued a fine to Nest for reporting failures. There have been some cases where fines have been issued for technicalities in the production of the statement, rather than what any industry expert would suggest is poor governance.
LCP said many statements have become unwieldy - regularly over ten pages in length. In addition, the information needed to satisfy TPR about regulatory compliance is unlikely to be the same material which a scheme would send to a member of the scheme who simply wanted to understand more about how the scheme was run.
The consultant said two major changes are needed. First, it said the objectives of regulatory reporting to TPR and informing and engaging with scheme members should be achieved by two separate fit-for-purpose documents (and communications plans) rather than combined in a single statement.
Secondly, LCP said the process of mandatory fines by TPR for non-compliance should be relaxed in favour of a more proportionate approach.
LCP partner and head of DC Laura Myers, who is also the chairwoman of the Pensions and Lifetime Savings Association's DC committee, said: "It is reasonable to expect pension schemes to report back to regulators and members on how well they are being run but the language of regulators is not the same as the language of scheme members."
Myers added: "The threat of a fine means that chair's statements have become compliance-heavy documents, dominated by fears of legal action, rather than an opportunity to engage with members. We have come across some cases where the chair's statement appears to have sat on scheme websites entirely undisturbed by members from one year to the next.
"The DWP should seize the opportunity of this review to change the rules so that the regulator is given the information that it requires in one document and members get something meaningful which will help them to engage more with their pension scheme."
