New annual reporting requirements for defined contribution schemes: how trustees should prepare

There are considerable differences between the new regime and the old voluntary report, and trustees risk fines of between £500 and £2,000 if they do not comply. Trustees should make sure that they are well-placed to complete the chair's statement in advance.

The new governance standards

The new governance standards are set out in the Charges and Governance Regulations, and explained by the Pensions Regulator in new guidance. They require scheme trustees to demonstrate sufficient knowledge and understanding to effectively run the pension scheme; to ensure that financial transactions are processed promptly and accurately; and to regularly review costs and charges borne by members to ensure that these are value for money, amongst other things.

The regulations also introduced the requirement that trustees appoint a chair, which should have been done by 5 July 2015. A statement setting out how the new standards have been met, signed off by the chair, will from now on have to be included in a mandatory scheme annual report.

DC trustees will already be aware that they have had the opportunity to produce a voluntary statement along these lines by completing a standard form put together by the Pensions Regulator. This form allows you to report on the conclusions of your self-assessment of the scheme, relative to the standards described in Code of Practice 13 (59-page / 442KB PDF) and the associated guidance (33-page / 98KB PDF). The Pensions Regulator has suggested including this voluntary report with the new mandatory report and accounts, along with further details of your assessment of the scheme, if helpful.

The chair's statement must be included in the scheme's published annual report and accounts. The trustees as a group will also need to declare that they have produced the chair's statement as part of the scheme return. To emphasise the importance of this, you could be fined between £500 and £2,000 if you do not comply with the requirements.

Preparing for the chair's statement

The first chair's statement will generally be due within seven months of the end of the scheme year, unless the period that would be covered by that statement is three months or less. Once you have established when the first statement is due, it is a good idea for the trustees as a group to complete a draft statement well in advance. This will allow you to identify, and to rectify, any potential issues at an early stage.

Among the questions you should be asking yourselves before completing a draft statement are:

• do you know what the requirements for processing financial transactions are?
• have these requirements been met?
• have you identified all of your default arrangements?
• have you identified the member-borne charges caught by the charge cap?
• have you identified the transaction costs applicable to the default arrangements?
• have you identified how you will get this transaction cost information in future, if you have not been able to collate this?
• have you established how you will go about assessing charges and transaction costs so that they represent good value for members?

Your answers to some of these questions may require more detailed consideration.

Default arrangements

Even if your scheme does not describe a particular fund or strategy as its "default", it may be caught by the new governance requirements for default arrangements. These requirements do not necessarily only apply in circumstances where members have not expressed a choice as to where their contributions are allocated, as they can also apply where 80% of the contributing members or more are in the same arrangement. This might mean there is more than one default arrangement in a given scheme, and could even mean that further default arrangements emerge over time.

The strict letter of the legislation can create some surprising results. Guidance by the Department for Work and Pensions (DWP) (31-page / 531KB PDF) is there to help, but it is by no means comprehensive. It is therefore very much worth doing some detailed analysis, at least for the purpose of your first statement.

The charge cap

The 0.75% charge cap introduced by the regulations covers all administration charges and must be calculated in a particular way. The calculation may need to be adapted to make sure that any leavers in the scheme year are not charged in excess of the cap. Please also note that the percentage cap could be as low as 0.4% if a flat rate fee, or some other combination of fee, is also charged. This is also addressed in the DWP guidance. Again, some detailed analysis may well be required to ensure that you can discharge your duties.

The trustees as a group will also be required to confirm that they are meeting the charge controls as part of the scheme return, following changes by the Pensions Regulator.

Value for money

The Pensions Regulator has published material to help with the value for money assessment, but this remains a very difficult area for trustees. As with all trustee decision-making, the important thing is to follow the proper processes under trust law and to make sure the right considerations are taken into account.

The existing Code of Practice

Code of Practice 13 remains a very important guide as to how trustees should go about discharging their legal duties under pensions legislation and trust law. The new governance requirements and chair's statement build on, rather than replace, these legal duties. You should continue to make every effort to comply with Code of Practice 13 in addition to satisfying the new requirements.

A couple of areas included in the code of practice remain somewhat neglected by trustees, and the new regime provides a timely opportunity to address these. Both issues relate to existing legal requirements.

Under section 249A of the 2004 Pensions Act, trustees are required to set up and operate "adequate internal controls" to ensure the scheme is administered in accordance with the law and scheme rules. The Pensions Regulator requires you to enter into "clear and comprehensive contracts" with suppliers including clear service levels, standards of care and terms relating to data protection, data security, delegation, notice periods and termination costs and assistance in order to demonstrate compliance with this provision.

Regulation 4(7) of the 2005 Occupational Pension Schemes (Investment) Regulations requires trustees to give "due consideration" to asset protection, and to understand what would happen in the event of a problem. In particular, you are expected to establish whether the funds that they invest in qualify for the Financial Services Compensation Scheme (FSCS), and to communicate the position to members.

Understanding and managing the contract risk associated with third party relationships is an important part of complying with Code of Practice 13, and your associated legal duties to members.

Tom Barton is a pensions law expert at Pinsent Masons, the law firm behind Out-Law.com.