The Chair s Statement Defined Contribution (DC) Scheme Governance 1 July June 2018

Transcription

1 The Chair s Statement Defined Contribution (DC) Scheme Governance This statement is produced pursuant to Regulation 17 of the Occupational Pension Schemes (Charges and Governance) Regulations It explains how the Commonwealth Bank of Australia (UK) Staff Benefits Scheme is meeting the governance standards that apply to occupational pension schemes that provide money purchase benefits. Default investment arrangement Members of the Scheme who do not make an explicit choice regarding the investment of their funds will be in the default strategy arrangement. In January 2016 the Trustee implemented a multi-asset fund throughout the savings period as the default arrangement. This is believed to be appropriate to meet the needs of a majority of the membership as it offers potential growth opportunity alongside management of downside risk through diversification. The multi-asset fund selected for the default arrangement was the Aberdeen Standard Life Enhanced Diversified Growth. In arriving at the default strategy, the Trustee considered the return profile of the investments within the default option and the DC charge cap, as well as the availability of new pension flexibilities introduced in the 2014 budget. A high-level review of the default arrangement was undertaken during the year, with particular reference to member ages and pot size, the performance of diversified growth funds generally and the EDGF s specific fund performance. As a result, the Trustee felt that the default continued to meet its aims and objectives as set out in the Statement of Investment Principles but agreed to undertake a more detailed review in the forthcoming year. The Ongoing Charges Figure (previously known as the Total Expense Ratio) for the Aberdeen Standard Life Enhanced Diversified Growth, the Scheme s default arrangement, is 0.50%. The Ongoing Charges Figure (OCF) includes the Annual Management Charge and a variety of other operating costs to cover the cost of running the fund. It includes administrative costs such as maintaining records, producing reports and calculating the daily unit price, as well as the research that goes into deciding what assets to buy and sell. The maximum Ongoing Charges Figure allowed for a default fund is 0.75%. Other investment options The Trustee also makes available a range of funds which may be chosen by members as an alternative to the default arrangement. These funds allow members to take a more tailored approach to managing their own pension investments. The OCF for each of the non-default funds ranges between 0.1% and 1.4% (see overleaf) and information for each fund is available via the BenPal member portal which is available to all active and deferred members. They are also published in the annual newsletter which is issued to all members via BenPal or by post to those members who have opted out of electronic communications. Processing Scheme transactions The Trustee has a specific duty to ensure that core financial transactions (including the investment of contributions, transfer of member assets into and out of the Scheme, transfers between different investments within the Scheme and payments to and in respect of members) relating to the DC section are processed promptly and accurately. These transactions are undertaken on the Trustee s behalf by the Scheme administrator, JLT Benefit Solutions Limited and its investment managers, namely Legal & General Insurance Management (L&G), Standard Life, First State Investment (UK) Limited (incorporating Stewart Investors), Baillie Gifford and M&G. The Trustee has reviewed the processes and controls implemented by those organisations as audited by independent internal controls audits and has concluded them to be suitably designed to achieve these objectives. 1

2 The Trustee has agreed service levels with JLT and receives quarterly reports which cover all activity undertaken. This allows the Trustee to monitor JLT s compliance with its agreed Service Level Agreement at its regular Administration Sub Committee meetings and raise any issues. Throughout the period, JLT have fallen below their contractual service levels on one occasion. During the year, due to an increasing number of issues being raised, the Trustee has overseen regular communications between the administrator and employers to resolve a small number of individual member issues, some of which have arisen as a result of poor timeliness. Where a loss to a member has been identified, the member has been compensated to rectify the shortfall. The Trustee engaged with JLT on the issues being experienced to minimise future issues and following discussions, steps to re-locate the service to a different JLT office were taken. There have been no issues with the accuracy of the service provided and no systemic issues have been identified. In light of the actions taken, the Trustee considers that the requirements for processing core financial transactions specified in the Administration Regulations (The Occupational Pension Schemes (Scheme Administration) Regulations 1996) have been met. No charge is made to members for administration services delivered in line with statutory requirements. Occasionally, members will be asked to pay for specific requests, where these fall outside of the Trustees contract or are non-statutory and these are communicated to members regularly. Investment costs The charges and transactions costs borne by DC scheme members are assessed to the extent they represent good value for money for members. These transaction costs are not limited to the ongoing charges on member funds, but also include trading costs incurred within such funds. Trading costs are associated with buying and selling assets within each fund. These charges will be higher for funds that trade regularly and less for those adopting a longer-term, buy and hold approach. The intention is that the extra returns made from successful trades will outweigh the costs involved. Details of the charges and transaction costs along with examples of the impact of these charges are provided in the attached Appendices 1 and 2. The Trustee requested information from the managers for the year ended 30 June 2018, but whilst the changes to processes required from managers to provide the transaction costs have started to be implemented, there has been a slow and mixed response despite several requests to the managers. Based on the information provided, the Trustee notes that a direct comparison of transaction costs between the managers would not be entirely appropriate due to the different methodology used or due to the different time periods over which the transaction costs have been provided. The Trustee has requested all fund managers to confirm what steps are being taken in order to provide the information in full and in a timely manner. The Trustee will continue to monitor the situation and based on managers responses to date, expect reporting to become more regular and consistent over time. The Trustee is satisfied that investment costs are in line with expectations for the asset classes they invest in. Value assessment The Trustee assesses the extent to which any charges and transaction costs which are borne by members represent good value for members. This includes: A comparison of the level of charges against the benefits delivered to members Ongoing review of the performance of the Scheme s investment funds in the context of their objectives; and A review of the non-financial benefits of the Scheme, including the quality of the administration service and communications. The Trustee believes that overall, the Scheme does offer its members value for money. 2

3 Trustee s knowledge and understanding Sections 247 and 248 of the Pensions Act 2004 set out the requirement for trustees to have appropriate knowledge and understanding of the law relating to pensions and trusts, the funding of occupational pension schemes, investment of Scheme assets and other matters to enable them to exercise their functions as trustees properly. This requirement is underpinned by guidance in the Pension Regulator s Codes of Practice 07 and 13. The Trustee has put in place arrangements for ensuring that the Trustee Directors take personal responsibility for keeping themselves up-to-date with relevant developments and all Trustee Directors are members of the PMI Trustee Group which provide access to articles on topical issues and seminars. A training policy is in place which is reviewed regularly. All the existing Trustee Directors have completed the Pension Regulator s Trustee Toolkit and new Trustee Directors are required to complete this within six months of taking up office. After this, new modules are completed within a reasonable period of their introduction. An assessment of Trustee knowledge against the Pension Regulator s curriculum was undertaken during the year and direction given on the source of further information to individual Trustee Directors where gaps were identified. Where a collective knowledge gap has been identified, training is managed through regular Trustee meetings. The Trustee Directors receive advice and regular briefings from professional advisers, and the relevant skills and experience of those advisers is a key criterion when evaluating adviser performance or selecting new advisers. The Trustee maintains a schedule for cyclical reviews of all advisers and service providers but undertakes out of cycle reviews as necessary. Taking account of actions taken individually and as a Trustee body, and the professional advice available to them, the Trustee considers that it is enabled properly to exercise its functions as Trustee of the Scheme. Governance statement As Trustee of the Scheme, we have reviewed and assessed our systems, processes and controls across key governance functions and we are satisfied that these are consistent with those set out in The Pensions Regulator s: Code of Practice 13: Governance and administration of occupational trust-based schemes providing money purchase benefits Regulatory guidance for defined contribution schemes Based on our assessment, we believe that we have adopted the standards of practice set out in the DC code and DC regulatory guidance. These help demonstrate the presence of DC quality features, which we believe will help deliver better outcomes for members in retirement. Work on member demographics and member communications is continuing. The Chair s statement regarding DC governance was approved by the Trustee Directors on 13 December 2018 and signed on their behalf by: Neil Cochrane Chair of the Trustee Board 3

4 Appendix 1 Charges and transaction costs The charges and transaction costs quoted throughout this Appendix are presented as a percentage of the value of benefits held by each member. The presentation of the charges and transaction costs, together with the projections of the impact of charges and costs have taken into account the statutory guidance issued by the Department for Work and Pensions, except for the following: The projections of the impact of charges and costs use the most recent 12 months of transaction costs data rather than an annualised average over the years (up to 5 years). This data is considered to be the most reliable and consistent data available given the industry have only started using a consistent approach since Charges The total member borne charges (Ongoing Charge Figures) quoted for the Scheme, in the year to 30 June 2018, include the cost of investment management charges and additional charges and expenses such as audit fees and custody fees. Whilst all the investment management charges are fixed, the additional charges can vary from day-to-day. Transaction costs Transaction costs can arise when the: fund manager buys or sells part of a fund s portfolio of assets; or platform provider or fund manager buys or sells units in an underlying fund. Transaction costs vary from day-to-day depending on how each fund is and prevailing market conditions. Direct transaction costs include custodian fees on trades, stockbroker commissions and stamp duty (or other withholding taxes) while indirect transaction costs are incurred through bid-offer spreads. Direct transaction costs are taken into account when the funds unit prices are calculated. This means that transaction costs are not readily visible, but will be reflected in a fund s investment performance. The FCA requires fund managers and providers to calculate transaction costs using the slippage method, which compares the values of assets immediately before and after a transaction has taken place. These costs can be negative in some cases if the value falls during the transition. These transaction costs do not include indirect transaction costs members may incur from buying or selling units in any of the funds. The transaction costs borne by members in the default arrangement were 0.02%, while the transaction costs borne by members outside of the default funds ranged from -0.07% to 0.32%, over the time period considered. Further details are provided in the table overleaf. 4

5 Table of funds The funds charges (as Ongoing Charge Figures ) and transaction costs applicable to the Scheme were: Charges Transaction costs % p.a. of the amount p.a. per 1,000 % p.a. of the amount p.a. per 1,000 Stewart Investors - Asia Pacific Leaders Stewart Investors - Worldwide Equity Stewart Investors - Global Emerging Markets Leaders Stewart Investors - Worldwide Sustainability First State - Global Listed Infrastructure First State - Global Property Securities First State - Greater China Growth L&G - Cash L&G - Global Equity Fixed Weights (50:50) Index L&G - Over 5 Years Index-Linked Gilts Index L&G - UK Equity Index L&G - Ethical UK Equity Index M&G - All Stocks Corporate Bonds Baillie Gifford - Global Alpha Aberdeen Standard Life - Global Absolute Return Strategies Aberdeen Standard Life - Enhanced Diversified Growth Source: Investment Managers Notes: Charges and transaction costs for Stewart Investors and First State Investments are over the 12 month period to 31 December 2017, as the managers were unable to provide the information for the 12 month period to 30 June The managers stated that they have not recalculated the data since the end of 2017, which will be reviewed at a later date. Charges and transaction costs for M&G are over the 12 month period to 31 December 2017, as the managers were unable to provide the information for the 12 month period to 30 June M&G had expected to provide the information by the end of October 2018 but this was delayed as a result of their third party, State Street, experiencing delays. Charges and transaction costs for L&G are over the 12 month period to 31 March 2018, as the manager were unable to provide the information for the 12 month period to 30 June L&G expect the data for Q becoming available in the middle of November Transaction cost data for Aberdeen Standard Life is represented using the new PRIIPS methodology from Annex VI 21 from the PRIIPs Regulatory Technical Standards Annexes which is based upon spread-based calculations for each asset class, as the manager was unable to provide the data calculating in accordance with the slippage methodology required. Aberdeen Standard Life stated that they will provide transaction cost data calculated in accordance with the slippage methodology for time periods from1 January 2018 onwards, and that this will be issued in late February or early March

6 Where transaction costs over the year were negative, we have used a transaction cost of zero for the illustrations in Appendix 2. The negative transaction costs arise as a result of the prescribed calculation methodology, which allows for the delay cost that takes the difference between mid-market price of an asset immediately before the order is placed in the market and the price at which the deal is struck. A negative transaction cost would result in a positive additional return for the fund. 6

7 Appendix 2 Illustrations of the impact of charges and costs The following tables show the potential impact over time of the costs borne by members on projected values at retirement in today s money for typical members over a range of ages. They do not need to be reduced further for the effect of future inflation. The Scheme is a non-contributory Scheme with employer contributions of either 10% or 12% for active members. Three scenarios are presented: Scenario 1 represents an active member with total contributions of 500 per month being paid into the Scheme. Scenario 2 represents an active member with total contributions of 1,000 per month being paid into the Scheme. Your total contribution may be more or less than illustrated in the scenarios. These contributions are assumed to increase in line with inflation. Scenario 3 represents a member who has left the Scheme with no further contributions being paid. All three scenarios assume: The starting DC pot size is 19,000. Your pot may be higher or lower than this; and The rate of inflation is assumed to be 2.5% each year. The transaction costs assumed for each fund are the current charges as shown in Appendix 1. The same return assumptions as used in the Statutory Money Purchase Illustrations included with members annual benefit statements have been used. Please note that these illustrated values: Are estimates using assumed rates of future investment returns and inflation; Are not guaranteed; and May not prove to be a good indication of how your own savings might grow. The illustrations have been carried out for the following five funds, which represent those funds with the largest amounts across the Scheme. 1. Standard Life Aberdeen Enhanced Diversified Growth (default arrangement) 2. Baillie Gifford Global Alpha Growth 3. Managers Global Equity Fixed Weights (50:50) Index 4. Managers UK Equity Index 5. Stewart Investors Global Emerging Markets Leaders The return assumption used for all five of these funds is 6.5% per annum. This is consistent with the Statutory Money Purchase Illustrations included as part of members annual benefit statements. 7

8 Scenario 1 Years Standard Life Aberdeen Enhanced Diversified Growth (default arrangement) are taken Baillie Gifford Global Alpha Growth are taken Managers Global Equity Fixed Weights (50:50) Index are taken Managers UK Equity Index are taken Stewart Investors Global Emerging Markets Leaders are taken 0 19,000 19,000 19,000 19,000 19,000 19,000 19,000 19,000 19,000 19, ,879 25,793 25,879 25,711 25,879 25,833 25,879 25,848 25,879 25, ,186 32,986 33,186 32,796 33,186 33,080 33,186 33,114 33,186 32, ,890 57,160 57,890 56,469 57,890 57,501 57,890 57,625 57,890 55, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,960 8

9 Scenario 2 Years Standard Life Aberdeen Enhanced Diversified Growth (default arrangement) are taken Baillie Gifford Global Alpha Growth are taken Managers Global Equity Fixed Weights (50:50) Index are taken Managers UK Equity Index are taken Stewart Investors Global Emerging Markets Leaders are taken 0 19,000 19,000 19,000 19,000 19,000 19,000 19,000 19,000 19,000 19, ,998 31,891 31,998 31,790 31,998 31,941 31,998 31,959 31,998 31, ,821 45,559 45,821 45,308 45,821 45,682 45,821 45,726 45,821 44, ,663 91,585 92,663 90,564 92,663 92,088 92,663 92,272 92,663 89, , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,358,202 1,270,115 1,358,202 1,192,282 1,358,202 1,310,477 1,358,202 1,325,575 1,358,202 1,096, ,817,508 1,683,187 1,817,508 1,565,885 1,817,508 1,744,534 1,817,508 1,767,568 1,817,508 1,422,839 9

10 Scenario 3 Years Standard Life Aberdeen Enhanced Diversified Growth (default arrangement) Baillie Gifford Global Alpha Growth Managers Global Equity Fixed Weights (50:50) Index Managers UK Equity Index Stewart Investors Global Emerging Markets Leaders are taken are taken are taken are taken are taken 0 19,000 19,000 19,000 19,000 19,000 19,000 19,000 19,000 19,000 19, ,760 19,694 19,760 19,632 19,760 19,725 19,760 19,736 19,760 19, ,550 20,414 20,550 20,284 20,550 20,478 20,550 20,501 20,550 20, ,116 22,735 23,116 22,375 23,116 22,913 23,116 22,978 23,116 21, ,125 27,204 28,125 26,349 28,125 27,632 28,125 27,789 28,125 25, ,218 32,552 34,218 31,029 34,218 33,323 34,218 33,608 34,218 29, ,631 38,951 41,631 36,541 41,631 40,185 41,631 40,644 41,631 33, ,651 46,608 50,651 43,031 50,651 48,461 50,651 49,154 50,651 38, ,625 55,770 61,625 50,675 61,625 58,442 61,625 59,446 61,625 44, ,976 66,734 74,976 59,675 74,976 70,478 74,976 71,893 74,976 51, ,219 79,852 91,219 70,275 91,219 84,993 91,219 86,945 91,219 59,081 10