The Pearson Pension Plan

This statement has been prepared in accordance with the Occupational Pension Schemes (Charges and Governance) Regulations 2015.

Governance

As set out on pages 4 to 8 of the Trustee’s Report the governance of the Plan, including arrangements with respect to Defined Contribution members, their contributions and benefits, is undertaken by the Trustee through its board and committees.

The Trustee’s priority is to provide a strong and stable pension scheme which operates in the interests of its members and to achieve this the Trustee Board and its Committees meet regularly to develop and agree strategy, monitor performance, discuss and explore issues relevant to the governance and administration of the Defined Contribution (DC) arrangements and make appropriate decisions. Meeting dates are agreed more than a year in advance and follow a formal agenda, for which the staff of the Plan and advisers prepare papers.

Trustee Directors have put in place arrangements for ensuring that they take personal responsibility for keeping themselves up-to-date with relevant developments and maintain training logs on an ongoing basis. The Pensions Director maintains a record of all Trustee Knowledge & Understanding (TKU) undertaken during the year, with any TKU compliance requirements shared with the Chairman each year, and incorporated into the Trustee Action Plan. Documents and guidance with Plan specific information, including Plan Rules, are provided via the digital board book system to all Trustee Directors and Committee members. The Pensions Director aims to identify training needs on any topics that become relevant and training is given in Trustee meetings, by Plan staff or advisers.

All new Trustee Directors during the year have completed the Pension Regulator’s trustee toolkit, and have received detailed briefings from both the Pensions Director and key advisers, as well as other Plan staff as required, tailored to individuals’ existing knowledge and expertise.

All changes to Plan rules are approved by the Trustee, and a Trustee questionnaire each year identifies whether Trustee Directors feel they have any further training needs. Elements of the Plan Rules are regularly discussed in Trustee meetings.

The Statement of Investment Principles (SIP) is available at https://pearson-pensions.com/go/statement-of-investment-principles and is also regularly discussed in Trustee and committee meetings. The combined knowledge and understanding of the Trustee directors, the independent members of certain committees and the staff of the Plan, together with external advice where appropriate, enables the Trustee to exercise properly its functions by providing collectively experience of governance, pension fund management, administration, investment, finance, audit and member representation.

The default lifecycle arrangement

Some members of the DC Sections of the Plan make their own investment choice but those who do not make an explicit choice regarding the investment of their funds are placed automatically into the default lifecycle arrangement. This aims to ensure that members’ pension savings are invested in appropriate funds at the appropriate times, based on the number of years until their selected retirement date.

The objective of the default lifecycle arrangement is to provide members with the potential for higher levels of growth during the accumulation of their retirement savings through exposure to equity and diversified growth funds and then to diversify gradually their investments in the years approaching retirement, in order to reduce volatility and safeguard members’ benefits near retirement. The default lifecycle arrangement is described on page 17 of the Plan’s financial statements and the asset allocations in the years leading up to retirement are shown below.

By investing in this manner, the Trustee takes into account members’ greater capacity for risk early on and reduced capacity for risk in later years. The Trustee considers this approach to be in the best interest of relevant members and relevant beneficiaries.

The default lifecycle arrangement meets the requirements for social environmental and ethical considerations set out in the Trustee’s Statement of Investment Principles which is available on the Plan’s website https://pearson-pensions.com/go/statement-of-investment-principles.

The Trustee reviewed the ongoing suitability of the default lifecycle arrangement in 2017/2018, having taken advice from its investment consultants and the resulting investment transition took place in April 2018.

The next scheduled review is due to take place in June 2020.

On a quarterly basis the performance of funds after charges comprising the default lifecycle arrangement is reviewed by the Investment Committee. Throughout the year ended 31 December 2018, investment returns have generally tracked benchmarks, and have performed in accordance with the objectives of the fund. Where performance is not in line with benchmarks, the Investment Committee have investigated the underperformance with the investment consultants and fund managers in order to establish if any further action is necessary.

Administration

The Trustee has a specific duty to secure that core financial transactions (including the investment of contributions, transfer of member assets into and out of the Plan, transfers between different investments within the Plan and payments to and in respect of members) relating to the DC Sections are processed promptly and accurately.

The Trustee delegates responsibility for this to the staff of the Plan and the Plan’s DC provider, Aviva. The agreement with Aviva incorporates specific service level agreements (SLAs) which include targets for the accurate and timely processing of core transactions. The Trustee monitors the performance against these SLAs via regular reports.

The staff of the Plan and Aviva have set up various controls to ensure the accuracy of processing core financial transactions, for example:

• a reconciliation to ensure all contributions have been processed using monthly Aviva reporting data;
• a reconciliation of monies disinvested for member refunds to amounts returned to the Plan by Aviva; and
• an annual reconciliation of membership using data supplied from Aviva against membership held on the pension administration database.

The Trustee considers that the requirements for processing core financial transactions specified in the Administration Regulations have been met.

Charges and transaction costs paid by members

The Administration Regulations also require the Trustee to make an assessment of charges and transactions costs borne by members of the DC Sections and the extent to which those charges and costs represent good value for members.

The current default lifecycle arrangement attracts an average management charge of 0.34% of assets under management. The annual management charge for individual members is between 0.29% and 0.45% depending on where they are in the lifecycle (between 0.28% and 0.67% prior to the April 2018 investment transition). This is much lower than the maximum allowed of 0.75% and the Trustee is satisfied that it has negotiated good terms for members taking account of the expected growth in the size of the DC Sections as a result of auto-enrolment.

In addition, there is a range of 11 separate funds (13 funds prior to the April 2018 transition) which may be chosen by members as an alternative to the default lifecycle arrangement. These funds attract annual management charges of between 0.18% and 1.16% (and between 0.28% and 1.20% prior to the April 2018 transition), and allow members to take a more tailored approach to managing their own pension investments.

Annual management charges for each fund for 2018 are shown below, but current charges can also be found on the Plan’s website at www.pearson-pensions.com/library

Aviva have provided transaction cost information from fund managers for all funds except Threadneedle pensions property fund which are not available at this stage but they are working with the manager to get the required underlying data as soon as possible. Transaction costs include both implicit and explicit costs. There is no standard way of calculating these implicit costs. The Financial Conduct Authority (FCA) has stipulated that a calculation methodology called ‘slippage cost’ should be used. This calculates the difference between the mid-price valuation immediately prior to the transaction and the actual execution price. Where information is not available, an alternative method is used to calculate implicit costs.

While these costs are important, they should not be looked at in isolation but should be viewed within the context of the performance of the fund or funds chosen as these costs are, ultimately, reflected in the performance of the fund.

Value for members

The Trustee has assessed the extent to which charges and transaction costs detailed above represent good value for money to members. Consideration has been given to how the charges and transaction cost borne by members (the cost of membership) compare with the services and benefits provided by the Plan (the benefits of membership). The Trustee has also compared the level of charges in each fund with the levels of return each has delivered to members, and with available information on other schemes.
The benefits of membership include (amongst other things):

• The design of the default lifecycle arrangement and how this reflects the interest of members.
• The range of investment options and strategies.
• The efficiency of administration processes, the quality of communications, support services and scheme governance, including the additional benefit of an in-house pensions team, solely focussed on the Plan’s arrangements.
• Access to retirement planning tools through the Aviva member site.
• Access to factsheets and guidance provided on the Plan website.
• Additional ill health and death benefits for Plan members.
• Access to additional discounts and benefits on a range of products with the Plan’s DC provider, Aviva.

Having considered the various aspects of the Plan, the Trustee is confident that the Plan is offering good value to members and will continue to monitor this.

In addition to value provided by the Plan to members, members also benefit from employer contributions, which in the case of the Money Purchase 2003 Section, provides £2 of contributions by the employer for every £1 contributed by the employee. Contributions provided by the employer for the Auto-enrolment section of the Plan are in line with legislation.

Illustrations

The illustrations show how different costs and charges can impact the pension pot over certain periods of time, based on a selection of investment funds. Statutory guidance from The Pensions Regulator has been taken into account in the preparation of these illustrations. Under each investment fund, there are two columns. The first shows the projected pension values assuming no charges are taken. The second shows the projected pension values after costs and charges are taken. By comparing the two you can see how much the charges over the years will impact your pension fund.

Illustration of effect of costs and charges for typical funds within Money Purchase 2003 Section

The assumptions used for this illustration are:

1. Year 1 is when members start saving and therefore their pot balance is £nil. Contributions are assumed to be paid £500 monthly increasing in line with assumed earnings inflation of 2.5% each year.
2. Cash flows are discounted at 2.5% a year.
3. Values shown are estimates and are not guaranteed.
4. Growth rates are based on the assumptions permitted by the Conduct of Business Sourcebook (CoBS) of the FCA.

Illustration of effect of costs and charges for typical funds within the Auto Enrolment Section

The assumptions used for these illustrations are:

1. Year 1 is when members start saving and therefore their pot balance is £nil. Contributions are assumed to be paid £100 monthly increasing in line with assumed earnings inflation of 2.5% each year.
2. Cash flows are discounted at 2.5% a year.
3. Values shown are estimates and are not guaranteed.
4. Growth rates are based on the assumptions permitted by the Conduct of Business Sourcebook (CoBS) of the FCA.

The Chairman’s Defined Contribution Governance Statement was approved by the Trustee on 25 June 2019 and signed on their behalf by:

J A B Joll
Chairman