Keepmoat Pension Plan (“the Plan”) - Governance statement for defined contribution pension arrangements and Statement of investment principles

The governance statement available to download on this website has been prepared by the Plan’s Trustee to report on compliance with governance standards introduced under The Occupational Pension Schemes (Charges and Governance) Regulations 2015 and amended by The Occupational Pension Schemes (Administration and Disclosure) (Amendment) Regulations 2018.

These governance standards relate to defined contribution (“DC”) benefits, also commonly referred to as money purchase benefits.

An extract of the governance statement can be found below which includes:

  • details of the Trustee’s review of the default investment arrangement
  • details of the costs and charges incurred by members under the Plan
  • example illustrations of the impact on pension pots of these costs and charges (the illustrations have been produced in line with February 2018 guidance from the Department for Work & Pensions entitled “Cost and charge reporting: guidance for trustees and managers of occupational schemes”), and
  • details of the Trustee’s assessment of the extent these costs and charges represent value to members.

Also available to download on this website is the latest Statement of Investment Principles signed on 27 August 2019, which is being published in line with The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 as amended by The Occupational Pension Schemes (Investment and Disclosure) (Amendment and Modification) Regulations 2018.  

Keepmoat Pension Plan - Extract of governance statement -  Reporting period covered - 6 April 2018 to 5 April 2019

1.Introduction

1.1 This statement has been prepared by the Plan’s Trustee (“the Trustee”) and reports on how the Trustee during the reporting period complied with the governance standards, introduced under The Occupational Pension Schemes (Charges and Governance) Regulations 2015 and amended by The Occupational Pension Schemes (Administration and Disclosure) (Amendment) Regulations 2018 (“the Regulations”). 

2.Default arrangement

2.1 Details of the current default investment arrangement is set out in Appendix 1 of the Statement of Investment Principles available to download on this website, which sets out the Trustee’s investment objectives and the strategy of the Plan.  It was prepared in accordance with regulation 2A of The Occupational Pension Schemes (Investment) Regulations 2005. The Statement of Investment Principles was signed on 27 August 2019. 

2.2 The Plan’s default investment arrangement is managed by Legal & General Investment Management (“LGIM”).  The default investment arrangement is a Lifestyle Strategy, which targets a normal retirement age of 65 and de-risks over a 10 year switching period prior to normal retirement age.

2.3 An analysis of projected pot sizes indicated that active members of the Plan are likely to view drawdown as a suitable route for accessing their pension savings, whilst deferred members are more likely to take a cash lump sum. Therefore, whilst capital preservation is important in the design of the default investment arrangement, the Trustee decided to target inflation-protected growth as pension savings will need to extend many years into the future.

2.4 During the reporting period the Trustee, with the support of its investment adviser, monitored the performance of the default investment arrangement strategy and the individual funds which make up the default investment arrangement.  The Trustee received investment monitoring reports for the 6 month periods to 30 September 2018 and then for the 6 month period to 31 March 2019.  In other quarters the Trustee reviewed past performance data published by LGIM.

2.5 No review of the structure of the default investment arrangement was undertaken during the reporting period.  The Trustee last undertook a comprehensive review of the structure of the default in December 2016.  This review took into account the profile and needs of the membership and led to the default investment arrangement being amended with effect from 20 June 2017.  A full review will be taking place in 2020 of the continued appropriateness of the structure of the lifestyle strategy.

3.Charges and transaction costs

3.1 Members bear charges deducted from the funds in which their DC benefits are invested.  The charges differ between the investment funds available.

3.2 All administration, communication and other costs associated with running the Plan are met by Keepmoat Limited.

Charges in relation to the default investment arrangement

3.3 The charges applied to members within the Plan are structured by the investment managers as an annual Total Expense Ratio (“TER”) which covers the cost of investment management.

3.4 The annual member-borne charge applicable to the default investment arrangement has been between 0.165% and 0.258%, depending on the point at which a member sits within the lifestyle strategy.  The weighting of funds held by the member are determined by the period to normal retirement age (“NRA”).

3.5 The charges for the individual investment funds used by the default investment arrangement were:

Fund

TER

LGIM Global Equity Fixed Weights (50:50) Index Fund

0.165% p.a.

LGIM Dynamic Diversified Fund

0.390% p.a.

LGIM All Stocks Index-Linked Gilts Index Fund

0.100% p.a.

LGIM Investment Grade Corporate Bond – All Stocks – Index Fund

0.150% p.a.

LGIM Cash Fund

0.125% p.a.

3.6 The five LGIM funds which make up the default investment arrangement are also offered to members on a self-select basis.  There are no other investment funds offered through the Plan.

Additional transaction costs

3.7 In addition to the charges above, transaction costs are incurred in the day-to-day operation of the investment funds, e.g. in relation to an investment fund’s trades and switching between investment funds.  Transaction costs in particular will vary significantly depending on a fund’s investment remit and on the market environment. 

3.8 The Trustee approached both LGIM to obtain details of any unreported costs incurred by members during the reporting period.

3.9 LGIM provided details of transaction costs incurred within the funds for the period 1 April 2018 to 31 March 2019.  It should be noted that a positive figure is where the transaction costs have been a drag on the fund and a negative figure is where transaction costs have actually resulted in a gain.  This may occur, for example, when buying an asset, the valuation price when placing the order might be higher than the actual price paid. This gain may offset other transaction costs resulting in a total negative transaction cost for the fund.

Investment fund

Transaction costs within fund (%)

LGIM Global Equity Fixed Weights (50:50) Index Fund

0.01%

LGIM Dynamic Diversified Fund

0.17%

LGIM All Stocks Index-Linked Gilts Index Fund

0.03%

LGIM Investment Grade Corporate Bond – All Stocks – Index Fund

-0.02%

LGIM Cash Fund

0.00%

LGIM states “Implicit transaction costs have been calculated as the difference between the price at which a deal was struck and the mid-market price of an asset at the time the order is placed in the market ('arrival price'). This is consistent with the implicit cost calculation methods allowable under PRIIPS guidance. The proportion of trades across Legal & General Investment Management for which the arrival price methodology was used to calculate implicit costs for the reporting period was 96% for equity trades, 87% for fixed income trades, 69% for FX trades [foreign exchange], and 0% for other OTC [over-the-counter] and ETD [exchange traded derivatives] derivative trades. Where the arrival price was not available, the implicit cost was calculated as the difference between the price at which a deal was struck and the mid-market opening price on the day of the trade. Where the mid-market opening price was not available, the mid-market previous closing price was used. Where the previous mid-market closing price was not available, a fixed fee was used to estimate the implicit costs of each trade. Indirect transaction costs have been calculated assuming a static fund structure as at 31 March 2019.

For any funds which hold an investment managed by a third party, the transaction costs provided by the third party manager are represented in this report as an indirect external fund transaction cost. Legal & General cannot guarantee the accuracy, integrity or completeness of such third party data. The recipient understands and acknowledges that any third party data in the disclosure may contain inaccuracies and/or omission and may not be independently verified. Where transaction cost information was not made available by the third party, transaction costs incurred by the externally managed fund have not been included.

3.10 Legislation was enacted early in 2018 to require investment managers to improve disclosure in this area. The Trustee believes that this, with development in how transaction costs are presented, will enable them to better disclose this information in future Plan years.

4.Cost & Charge Illustrative Examples

4.1 The Trustee has produced illustrations in line with February 2018 guidance from the Department for Work & Pensions entitled “Cost and charge reporting: guidance for trustees and managers of occupational schemes”.  These illustrations are set out below, and are designed to cater for representative cross-sections of the membership of the Plan. For each individual illustration, each savings pot has been projected twice; firstly to allow for the assumed investment return gross of the costs and charges of the fund the member is invested in and then again, but adjusted for the cumulative effect of the costs and charges of the fund.

4.2 To determine the parameters used in these illustrations, the Trustee has analysed the Plan membership data relevant to the reporting period of this statement and ensured that the illustrations take into account the following:

  • A representative range of real terms investment returns, including the lowest, the highest and the most popular (by number of members);
  • A representative range of costs and charges, including the lowest and the highest;
  • Representative pot sizes – for the Lifestyle strategy (the default investment arrangement) the following illustrations have been provided:
    • median pot size;
    • illustrative pot size of £10,000; and
    • illustrative pot size of £100,000.
  • Representative pot sizes – given the size of the Plan the median pot size for each self-select fund illustrated is deemed appropriate; and
  • The approximate duration that the youngest member using the fund would take to reach NRA.

4.3 The Trustee has determined not to include future contributions in these illustrations as it would be disproportionately burdensome, the Plan does not levy charges on contributions, and less than 6% of the Plan’s membership are active members of the Plan.

Default investment arrangement (the Lifestyle Strategy)

This is the investment strategy that is used by the largest number of members in the Plan (either because they have selected this strategy or due to it being the default investment arrangement).

Years of membership

Age: 25

Starting pot size: £28,000 *

Age: 25

Starting pot size: £10,000 **

Age: 25

Starting pot size: £100,000 ***

 

Before

charges

After

charges

Before

charges

After

charges

Before

charges

After

charges

0

£28,000

£28,000

£10,000

£10,000

£100,000

£100,000

1

£28,137

£28,042

£10,049

£10,015

£100,488

£100,150

3

£28,453

£28,167

£10,162

£10,060

£101,618

£100,595

5

£28,829

£28,346

£10,296

£10,124

£102,961

£101,236

10

£31,824

£30,873

£11,366

£11,026

£113,655

£110,261

15

£38,537

£37,080

£13,763

£13,243

£137,632

£132,428

20

£46,667

£44,534

£16,667

£15,905

£166,666

£159,051

25

£56,511

£53,487

£20,183

£19,103

£201,826

£191,026

30

£68,433

£64,241

£24,440

£22,943

£244,402

£229,431

35

£82,869

£77,155

£29,596

£27,556

£295,961

£275,555

40

£100,351

£92,667

£35,840

£33,095

£358,396

£330,953

                 

* This is the median pot size for the default investment arrangement

** This pot size is provided as a guide for members whose pot size is materially lower than the median

*** This pot size is provided as a guide for members whose pot size is materially larger than the median

LGIM Dynamic Diversified Fund

This fund incurs the highest costs by members within the Plan.

Years of membership

Age: 25

Starting pot size: £42,000 *

 

Before charges

After charges

0

£42,000

£42,000

1

£43,024

£42,795

3

£45,149

£44,430

5

£47,378

£46,128

10

£53,445

£50,662

15

£60,288

£55,641

20

£68,008

£61,110

25

£76,716

£67,116

30

£86,539

£73,712

35

£97,620

£80,957

40

£110,120

£88,914

* This is the median pot size for this fund

LGIM Global Equity Fixed Weights (50:50) Index Fund

This fund is the fund anticipated to have the highest future real terms investment returns.

Years of membership

Age: 25

Starting pot size: £23,000 *

 

Before charges

After charges

0

£23,000

£23,000

1

£23,898

£23,858

3

£25,799

£25,672

5

£27,852

£27,624

10

£33,728

£33,177

15

£40,843

£39,847

20

£49,459

£47,858

25

£59,892

£57,480

30

£72,527

£69,036

35

£87,827

£82,915

40

£106,355

£99,584

* This is the median pot size for this fund

LGIM Cash Fund

This fund is the fund anticipated to have the lowest future real terms investment returns and, of the funds currently selected by members, incurs the lowest costs by members within the Plan.

Years of membership

Age: 25

Starting pot size: £15,000 *

 

Before charges

After charges

0

£15,000

£15,000

1

£14,707

£14,689

3

£14,139

£14,086

5

£13,593

£13,508

10

£12,317

£12,165

15

£11,162

£10,955

20

£10,114

£9,866

25

£9,165

£8,885

30

£8,305

£8,001

35

£7,526

£7,205

40

£6,820

£6,489

* This is the median pot size for this fund

Notes to costs and charge illustrative examples

  1. Projected pension pot values are shown in today’s terms, and do not need to be reduced further for the effect of future inflation.  It is for this reason some funds show negative real growth
  2. Inflation is assumed to be 2.5% each year
  3. No further contributions are assumed to be paid
  4. Values shown are estimates and are not guaranteed
  5. Charges for each fund used in the illustrations are those outlined in this statement
  6. Illustrations have not been included for either the LGIM All Stocks Index-Linked Gilts Index Fund or the LGIM Investment Grade Corporate Bond – All Stocks – Index Fund as these funds have not currently been selected by any members of the Plan
  7. The projected growth rates for each fund or arrangement are in line with those produced for the Plan’s 2019 Statutory Money Purchase Illustrations , and are as follows:

Fund

Assumed Investment Return

LGIM Global Equity Fixed Weights (50:50) Index Fund

6.5%

LGIM Dynamic Diversified Fund

5.0%

LGIM All Stocks Index-Linked Gilts Index Fund

1.0%

LGIM Investment Grade Corporate Bond – All Stocks – Index Fund

2.0%

LGIM Cash Fund

0.5%

5 Value for members

5.1 Regulations require the Trustee to assess the extent to which the charges and transaction costs borne by members represent good value. 

5.2 The charges and transaction costs borne by members cover the costs of providing the investment management services. All other charges, including the costs of administration services and communications are met by Keepmoat Limited.

5.3 An annual value for members’ assessment was undertaken as at 5 April 2019 with the assistance of the Trustee’s advisers.

5.4 The assessment considered in relation to investment services:

5.4.1 the range of investment options available and the design of the default;

5.4.2 the arrangements for monitoring the performance of the investment funds; and

5.4.3 the governance arrangements.

5.5 The Trustee concluded that the Plan continues to offer good value in relation to the charges and transaction costs borne by members.

5.6 In reaching this conclusion, the Trustee recognised:

5.6.1 low cost does not necessarily mean better value;

5.6.2 a default investment arrangement which includes automatic de-risking as members approach retirement based on continual analysis of the membership profile remains in effect;

5.6.3 a suitable range of self-select funds are available to members;

5.6.4 monitoring processes of the default investment arrangement strategy and fund performance continue to remain in place; and

5.6.5 In the 2019/20 the Trustee will be considering the stewardship of investments in more detail.

5.7 In relative terms, the comparative charge for the Plan (i.e. 0.165% to 0.258% p.a. depending on where in the Lifestyle Strategy a member sits) is comfortably below the average charge of 0.42% p.a. identified for unbundled trust based schemes in the 2016 Pension Charges Survey (published by The Pension Regulator and Government Social Research in October 2017).

5.8 The assessment considered just those services for which members bear or share the costs.  Factors that were not considered but that add value include:

5.8.1 the services fully paid for by Keepmoat Limited, e.g. the administration and communication services, and the services of legal advisers, consultants and auditors;

5.8.2 the operation of the professional Trustee, with a duty to act in the best interest of members, which is paid for by Keepmoat Limited;

5.8.3 the Employer contributions available through the Plan; and

5.8.4 the operation of salary sacrifice for Employee contributions.

End of extract

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