The Investment Governance Group’s Victoria Nye explains the thinking behind the body’s six principles for DC pension scheme governance to Matthew Craig
Setting standards is something of a balancing act. Set them too high and they may appear unattainable and demotivating; set them too low and there seems little point in having them.
This was the challenge facing members of the Investment Governance Group’s defined contribution (DC) sub-group, chaired by Victoria Nye, when it published a consultation paper, Investment governance of defined contribution pension schemes, in February. The paper sets out six principles for DC scheme governance, and the clear aim is to pull people out of their comfort zone, rather than make the standards too easy.
“It is very important to say this is about best practice and that is not commonplace in the market by definition,” says Nye. “The idea is to bring more schemes up to higher levels.”
Create a team effort
She explains the overall intention is to create a team effort between employers, DC scheme providers, advisers and DC scheme members to push for best practice.
The IGG itself was set up in response to a 2008 review of the Myners principles for institutional investment, as an industry-led forum to provide tools and guidance for raising the bar in investment governance. The remit for its DC sub-group is to look at how the Myners principles could be applied to DC schemes, particularly contract-based plans, such as stakeholder and group personal pensions (GPP) schemes.
Nye believes her background as director of training and education at the Investment Management Association, the trade body for UK fund managers, was a key reason why she was asked to chair a team of pension and investment industry representatives looking at DC investment governance and decision-making.
As a starting point for the six principles, Nye took what she describes as “Myners’ DC originals”: one individual’s A4 sheet with a list of DC issues from the original Myners review. “He said ‘this is my checklist and I give myself marks out of 10 on how I am doing’,” Nye explains. “He had a constant aspiration to move his marks up and that is exactly how it should be.”
Comply or explain
Many schemes in the DC environment are contract-based, rather than trust-based, and the employers setting them up will vary hugely in size, sophistication and the resources they command. This is one reason why Nye believes the six principles should operate on a comply-or-explain basis, where those involved in running a scheme have to explain and justify acting contrary to a principle. “There is no reason why someone in a contract-based DC scheme should be worse off than someone in a trust-based scheme,” she says. “In fact, they could be better off if the trustees are incompetent or get in the way.”
In the past, contract-based DC schemes have often been sold to employers as a way of shedding the burden of offering a trust-based DC or final salary pension scheme. But the consultation paper could be a shock to any employers that thought they could abdicate their pension obligations in this way. For instance, the table of accountabilities in the consultation paper shows employers are seen as the primary decision-maker for contract-based DC schemes in all areas other than compliance with, and monitoring of, legal and regulatory requirements, which rests with the provider.
Setting out the table of accountabilities for decision-makers in the consultation paper caused controversy at the discussion stage, says Nye. “Who is accountable in a contract-based scheme? The trustees obviously are in a trust-based scheme. In a best-practice scenario, we want the employer to be engaged to the point where they really care about the quality of the scheme.”
Check the scheme is working
Although an employer can delegate monitoring the scheme to a specialist, such as a financial adviser or employee benefits consultant, ultimately it has to remain sufficiently engaged to be able to check the scheme is working properly. “Employers set up schemes for the good of the employees and they have appointed a provider,” says Nye. “If the provider is not doing a decent job, who is going to say ‘get your act together or we will move on’? The employer cannot just dump their obligations.”
Employee engagement with DC schemes is something of a challenge in many cases, because of member apathy, inertia and the desire of some to maximise their take-home pay instead of saving for a pension. One way to tackle this is through initiatives such as auto-enrolment and the use of automated scheme features, for example default funds for members who do not make an active investment choice. But Nye recognises there may be a tension between offering members a wide choice of investment options, which may make some unable to decide, and offering only one investment option, which may boost scheme take-up, but clearly restricts choice. But she points out that individuals who want a wider choice than that on offer through a workplace scheme can make their own arrangements elsewhere.
In any event, employers should have an input on the default funds used because they will know their workforce better than a scheme provider does.
Arrival of Nest†
The arrival of the national employment savings trust (Nest) scheme from 2012 could also affect DC provision.
Mark Fawcett, investment director of the Personal Accounts Delivery Authority, was a member of the IGG’s DC sub-group. Nye says: “He was very much saying Nest will be one of a number of DC schemes and it wants to follow these principles in the same way as everybody else.”
Nye says the sub-group has tried to create “an easy-to-read checklist for employers to look through and see how they and their provider match up to what is defined as best practice”. She adds: “It is all covered by six principles. Less is more, but we will drill down into the detail later if people want it.”
Career History: Victoria Nye
Employment: 1997 to date
Director, training and education, Investment Management Association
Director of communications, Investment Management Association
Fidelity Investments, Various roles including: Business manager; head of portfolio management services and funds-of-funds business corporate communications manager; and investment analyst
Company research and equity sales, Chase Manhattan Securities
Other roles: 2009 to date
Chair of North Wilts Economic Partnership
2008 to date
Chair of Investment Governance Group sub-group for DC pensions
2005 to 2009
Chair of Financial Services Authority’s families working group on financial capability
Board member, Training and Development Agency for Schools
1996 to date
Founder/trustee, Personal Finance Education Group
The IGG’s six principles for best-practice investment decision-making and corporate governance for DC pension schemes
Read more articles from Special report 2010: contract-based pension governance