As an employer, what legal obligations do we have if the default fund of our defined contribution (DC) pension turns out to be a poor investment?
In strict legal terms, employers do not have any particular legal obligation to select or monitor a default fund. But that may be a moot point as employees’ real focus is likely to be on their impression of how the employer has helped them to understand the risks.
So we are not surprised to see governance in DC pensions creeping up the agenda as an effective tool to mitigate risk for employers.
Members of trust-based DC schemes can take comfort from the fact that the trustees have a supervisory role. It is they, not the scheme sponsor, who decide on the investment choices to be made available and who bear responsibility for monitoring (and adjusting) the providers or funds offered.
In contract-based schemes, each member’s relationship is with the pension provider. The employer’s responsibility is limited to paying over its contributions. But more employers are thinking about a degree of quasi-stewardship, with some establishing a governance committee with a watching brief over provider and default fund selection.
For stakeholder pensions, special rules protect employers from staff claims about provider choice or monitoring. But there is no equivalent US-style ‘safe harbour’ for employers generally to fall back on in relation to DC pension provision.
A key motivation for employers in choosing DC pension provision is that decisions on investment choice (and, ultimately, risk) rest squarely with the individual members. But employers would be sensible to think again before taking an entirely hands-off approach.