DC Governance Case Studies

June 2019

Pensions governance is becoming increasingly vital both to clients, who recognise the value which a strong governance framework can provide, and to the Pensions Regulator, who wants schemes to demonstrate their focus on implementing a strong governance process.

bac was very proud to be named the 2018 FT PIPA Governance Adviser of the year, reflecting our strategic approach to governance shown by our work for BAE Systems, Honda, Saint-Gobain and Tesco. In this publication we look at the areas of governance we have been working in over the past year and the solutions we have helped our clients to implement.

Defined Contribution governance

For both trustee boards and governance committees, it is becoming increasingly important to be able to demonstrate a clear focus on DC governance. However, with much less history than for DB governance, best practice is still evolving. In addition, given the different balance of risk between members, trustees and sponsor, the objectives for DC governance are subtly different from those for DB pension schemes.

Often we work with clients that have very little structure to their DC governance at the point we are appointed. bac’s starting point is to help the client to understand their objectives and to tailor a governance solution accordingly.

In the sections that follow, we take a detailed look at four different areas in which our clients have been focusing their DC governance.

Targeted member outcomes

Simply measuring investment performance is one thing, but how do you go one step further and assess the impact which the underlying investment strategy is having on members’ retirement?

For a large DC plan, we put a monitoring tool in place to enable the company and trustees to track how members’ accumulated funds were developing relative to the benchmark outcomes which the company had used when it set up the scheme. This involves looking at a cross-section of the membership on a quarterly basis. Significant divergence between experience and targets is fed into investment strategy discussions and targeted member communications. The company also considers the analysis with a view to considering whether any changes in contribution rates would be sensible in the future.

Communication strategy

Communication is vital for DC pension provision and, in our experience, the best way to engage the members is through regular, systematic communication.

For several of our DC clients we have established a threeyear communication plan with the following features:

  • an annual core cycle of repeat communications designed to reinforce the value of the plan, the importance of saving for retirement, the role of investment decisions and the need for retirement planning
  • special topics addressed in a specific year, for example a more focused set of materials on preparing for retirement
  • ad-hoc issues or events that require communication, for example a change of provider or a legislative change.

Several of these communication plans have been developed with the help of small member focus groups. These groups have explored member understanding, what they think of previous communications and what interests them most currently.

A variant of this is to interview a sample of members after they have made important saving decisions; for example, after joining the scheme, making investment choices or going through the retirement process. Feedback can also be used to improve the provider’s service.

Intelligent use of scheme data

A wealth of data is available in respect of the membership profile of DC schemes, along with members’ investment choices and retirement patterns. Part of the governance for a number of our DC schemes is to look in detail at different aspects of this data throughout the year and discuss whether this triggers any actions.

Over the last year, a manufacturing client has looked in detail at the retirement decisions which their members have made. The DC governance committee is using this review to amend its “close to retirement” communications and to revisit the rationale for its choice of default investment strategy.

A retail client has analysed where members are spending their time on the pensions website, in order to better understand the key areas of concern for members and where future communications could be targeted.
Risk register

Whilst a common tool in the DB world, the use of risk registers in the DC environment is still an emerging practice. As a result, the quality of registers in use does vary significantly.

In our experience, a combination of the Regulator’s DC assessment and a scheme-specific risk register tends to be most effective. The risk register should be reviewed quarterly for significant movements with an annual more detailed review combined with an updated DC assessment.

Final thoughts

Improving your scheme’s governance needs to be done carefully, otherwise at best it will be ineffective and at worst it can actually be harmful. In our experience the following steps are necessary if you want to successfully implement change:

  • make sure you are clear on the required resources and that these are put in place before you start
  • ensure you have the buy in of all key stakeholders. Changes to governance cannot be forced on people, they need to understand the reasons for change and agree the new approach will help.

bac has developed a tool to help you triage your governance needs and quickly identify areas of weakness, so you can develop an action plan appropriate to your circumstances.

Involving key stakeholders in this review process can quickly help build consensus on what needs to change.

If you would like to find out more information about any of these case studies or how bac can help you improve your governance, please contact one of our senior team at governance@bathactuarial.com