The Pensions Regulator says it will not accept two classes of scheme member – those that benefit from good governance and administration and those that do not. As part of its focus on 21st century trusteeship and governance, the Regulator is gearing up for a “targeted education and enforcement drive” during 2017.
DC code of practice
The new code, which came into effect in July 2016, is significantly shorter and more focussed than its predecessor, although it still runs to 37 pages!
It applies to all occupational trust-based pension schemes with two or more members, offering money purchase benefits, which includes AVCs. The code sets out the standards and practice that the Regulator expects trustee boards to meet. It is supported by 6 helpful guides, which cover the topics shown in diagram 1.
The guides are designed to give trustees practical help and information, including examples of approaches they might take and factors to consider. We look at each of these 6 areas very briefly in turn, picking out the key themes which emerge from the new DC code.
Much of this is common sense – trustees are expected to be honest, competent and capable, and to act in the best interests of scheme members and their beneficiaries. They should have robust processes in place for appointing the trustee chair and member-nominated trustees.
There are additional requirements placed on multi-employer schemes, which include master trusts, concerning representation and the independence of the trustee board. For such schemes, trustees need to provide members with a way to express their views about the scheme.
Scheme management skills
Trustee boards need to identify and discuss the key risks for their scheme and put in place controls to manage those risks. A risk register is central to this (for more information, see our Beginner’s guide to risk registers). Trustees are expected to have a certain level of knowledge and understanding of their scheme and its rules, along with pensions, trust law and investment principles. Any gaps in this knowledge should be identified and addressed.
One of the Regulator’s main concerns is that trustees do not spend an appropriate amount of time running their scheme and this includes helping sponsoring employers to understand and carry out their responsibilities. Trustees must have controls in place to identify and manage any conflicts of interest.
Trustees are required to appoint scheme advisers and service providers and should have the appropriate skills to manage those relationships. Trustees must be willing and able to challenge the advice they are given and understand how it impacts on their decisions. Trustees need to robustly monitor the performance of advisers and service providers, ensuring they deliver value for money for members (see also our Beginner’s guide to reviewing advisers).
Trustee boards should regularly monitor the performance of their administrator and have appropriate Service Level Agreements in place. Trustees should have a good knowledge of the procedures and controls the administrator uses to ensure that core financial transactions are processed promptly and accurately, using electronic means wherever possible. An adequate business continuity plan should be in place and reviewed regularly.
Trustees must ensure that the data they (or the administrator) hold is complete and accurate. This data must be reviewed annually and there must be a plan in place to fill any gaps identified. Regular reconciliations of contribution and investment records should be carried out.
It may seem obvious but trustees must only take investment decisions with advice from a suitably qualified person and should appoint a fund manager to manage the scheme’s investments. There should be a clear governance structure documented in the Statement of Investment Principles, with regular monitoring of performance. The security of scheme assets should be considered.
When setting investment strategy, trustees should take account of the needs of active, deferred and pensioner members, ensuring that there is an appropriate choice of funds. Member engagement should cover not only when members might want to take their benefits but also in what form (annuity, cash, drawdown, etc.). Any default strategy should be reviewed regularly.
Value for members
Charges are only one aspect of delivering good value for members. Trustees should understand their members’ characteristics and financial needs when considering the quality of their scheme management, administration, investment and communications. Any areas which do not provide good value should be documented and steps taken to improve the position.
Trustees must assess the charges involved in the scheme, including transaction costs, and decide if they are good value for members. This assessment must be explained in the annual chair’s statement. There is a cap applying to the charges levied on members in default arrangements used for automatic enrolment, whilst some previous charging practices are now banned (for example, charging more to non-contributing than to contributing members). All member-borne charges need to be disclosed in the annual chair’s statement.
Communicating and reporting
The trustees’ focus should be on helping members to make the right decisions for them. As you would expect, all communications must be accurate, clear, relevant and in plain English. Trustees are encouraged to consider new technological options for the format of communications.
Members need to be regularly reminded that the level of their contributions is a key factor in determining the size of their pension benefits. Trustees must make members aware of their right to transfer to another scheme at any age and their right to purchase an annuity on the open market. The content of retirement wake-up packs is prescribed and must include certain information about the options on retirement and the risks those options carry.
Trustees should have robust processes to check for pension scams when a member requests a transfer and information on how to spot a scam should be given to members.
An annual chair’s statement must be produced to cover how the trustees have met certain legal requirements on governance. The trustees are required to report certain information and to complete an annual scheme return for the Regulator. The trustees also have whistleblowing duties when a breach of the law occurs.
Assessing your own scheme
The Regulator expects trustees to assess their own scheme against the DC code on an ongoing basis. To that end, the Regulator has published a self-assessment template which can help trustees to:
- determine where their scheme meets the code’s standards and where key areas of weakness lie
- develop their annual chair’s statement.
An online tool can be a very straightforward way for trustees to carry out regular assessments of their compliance with the DC code.
21st century trusteeship
The Regulator’s discussion paper on 21st century trusteeship and governancewas designed to stimulate a dialogue about how it can raise standards of trustee competence and improve the governance and administration of pension schemes. The paper focused on private sector trust-based schemes, both DB and DC.
The Regulator’s viewpoint can best be summarised under its heading “good governance matters”. It comments that having the right people, structures and processes in place to manage a scheme leads to effective decision making and increases the likelihood of good outcomes for members. To back that up, it quotes some 2006 research which showed the “poor-good” governance gap to be worth at least 1%-2% of additional return per annum on members’ DC funds.
The Regulator clearly finds it unacceptable that some members are at greater risk of poor outcomes in later life purely because they happen to have been employed by an employer with a badly-run pension scheme. This is why, in 2016, it took a particularly tough stance towards imposing fines on any DC schemes which did not submit their annual return or produce their annual chair’s statement on time.
The Regulator reinforced its positioning in relation to DC schemes when it released its annual DC Trust report at the end of January 2017, noting there are particular issues for smaller schemes which do not have the advantages of scale.
What can we expect in 2017?
There was little support from the responses to the 21st century consultation for the introduction of mandatory qualifications for trustees, but the Regulator is concerned that the use of the term “professional trustee” is not sufficiently clear. In 2017 it has promised to define what it means by a professional trustee and to set out clearly the higher standards it expects from such trustees.
In terms of lay trustees, the Regulator has promised to launch an education drive in the spring of 2017, which seems likely to focus on the further development of its trustee toolkit, targeted guidance and self-help tools. It is also expected to push for employers to allow trustees more time off for preparation for/attendance at trustee meetings and to pay for them to receive training.
In terms of master trusts, the Pensions Bill currently before Parliament is designed to give the Regulator significant new powers to authorise and supervise master trusts.
The Regulator’s, and the Government’s, other main concern is to see how they can encourage and facilitate the consolidation of small DC schemes, but this is likely to be a more difficult nut to crack.
For more information on how bac can help you to strengthen the governance of your scheme, including the online governance management tools which we have developed for our clients, please contact us.
In the news this week, the second Lloyds judgement says that historic transfer payments need to reflect GMP equalisation, the Pension Schemes Bill moves back to the Lords, TPR gets tough on AE compliance, the FCA surveys DB transfer advisers again and another buy-in is completed.
This quarter’s Arena has a summary of our recent Pensions Perspective, “Endgame planning comes of age”, which looked at how long-term funding and investment plans are evolving and why companies are increasingly taking the lead in designing an endgame strategy. It also shows all the usual financial and investment analysis for the quarter ending 30 September 2020.
Journey plans or glide paths may have been around for a long time but they’re at the heart of the Regulator’s proposed new funding code. In this Pensions Perspective, Leonard Bowman looks at how long-term funding and investment plans are evolving and explains why companies are increasingly taking the lead in designing an endgame strategy for their schemes.
This quarter’s Arena has a summary of our recent Pensions Perspective, “Emerging from lockdown”, which looked at how best to tackle the most common pension issues which companies are currently facing. It also shows all the usual financial and investment analysis for the quarter ending 30 June 2020.
As we keep hearing, we are living in unprecedented times. However, as we turn our attention to the future, what does the “new normal” mean for defined benefit pension schemes? In this Pensions Perspective, Leonard Bowman considers the most common pension issues that companies are facing and how best to ensure that the company approaches these on the front foot.