Good governance is a key issue for defined contribution (DC) pension schemes, but it can be tricky to keep on top of at all times.
If you read nothing else, read this…
- The Pensions Regulator’s code of practice sets out six principles and 31 quality features.
- The code is useful to help employers meet pension governance requirements.
- TPR expects pension schemes to comply with the code.
- The code may need to be rewritten to accommodate new measures introduced by the government.
To help schemes with this task, The Pensions Regulator (TPR) published its defined contribution (DC) code of practice and regulatory guidance, Principles and features for good-quality pension schemes in November 2013.
The advice, which is aimed at trust-based DC schemes but can also apply to contract-based plans, sets out six principles and 31 quality features that, if followed, can help improve pension scheme member outcomes.
The six principles cover a number of key issues for DC pension plans. First, they set out essential scheme characteristics, such as ensuring all members get value for money and that all costs and charges borne by members are transparent and clearly communicated.
Second, they help to establish governance, for example by requiring those running schemes to support employers’ responsibility to provide accurate information to pension advisers and service providers, ensuring sufficient time and resources are made available for ongoing governance.
The principles also set standards for those accountable for scheme decisions, monitor ongoing governance, make sure schemes are well administered, and set out required communications to members to ensure they make informed decisions about their retirement savings.
Phil Yeoman, head of DC policy at The Pensions Regulator, says: “The code of practice focuses on quality features that are related to the requirements of pensions legislation. Employers should be following these. The DC regulatory guidance addresses those DC quality features that reflect our view of good practice.
“The DC quality features frame our regulatory strategy for occupational DC trust-based schemes, although we would like to see the take-up of our principles and features across the whole DC landscape.”
Better-run schemes
TPR’s standards can be adapted to schemes’ individual needs. If followed correctly, this can result in better-run schemes that benefit from good governance and give members value for money.
One of TPR’s quality features requires trustees to carry out a regular strategic review, perhaps every three years. Employers should use this to ensure their scheme continues to be fit for purpose for members and competitive with other options available in the market.
Sarah Swift, partner at law firm Eversheds, says: “This is a useful summary of what to do and, if followed, a pension scheme will probably be in a better place from a governance perspective. A number of trustees are doing just that and they now understand their duties and employers will have peace at mind that they are delivering a good-quality scheme for staff.”
TPR has also published a standardised governance statement, which employers are advised to ensure trustees use to assess their scheme against the regulator’s quality standards. This can help to identify risks and see where standards fall short.
Yeoman adds: “This governance statement is useful for employers in explaining scheme standards. It should be made available to both employees and employers by publishing it in the scheme’s annual report and accounts or on the [organisation’s] website.”
Employers that ensure their pension scheme adheres to TPR’s principles and codes may find these useful when tackling some of the issues and challenges that may arise around pensions, for example relating to auto-enrolment compliance.
Richard Wilson, policy lead for DC pensions and investments at the National Association of Pension Funds (NAPF), says: “There are many employers and trustees following TPR’s principles. They find it useful for their schemes and are able to correctly document, as well as consider, all of the right issues. This sort of guidance can help them think about what to do to get a better scheme and offer better outcomes for employees.”
Expected to comply
The code of practice is not a statement of the law, although TPR expects employers to comply with both the code and its guidance. Although no direct penalty applies to schemes that fail to comply with TPS’s code, its quality features are underpinned by legislation.
Therefore, if a TPR quality feature is absent from a scheme, it is likely to be in breach of the law. In such cases, TPR will use the code as a core reference if it has to bring enforcement action against a scheme in relation to breaches of pensions legislation.
Evershed’s Swift says: “If legislation is breached, there could be fines of up to £5,000 under section 10 of the Pensions Act in the case of an individual.
“Trustees and employers should already be complying with the code of practice. I worry that there is too much compliance out there to follow, and that some things are being missed.”
However, new government measures around pension scheme governance may force the regulator to review its DC code of practice and regulatory guidance.
The government’s command paper, Better workplace pensions: Further measures for savers, published on 27 March, set out new moves to improve DC schemes.
TPR’s Yeoman says: “There may be some changes to the DC code and guidance, both as a result of the Budget and the Department for Work and Pensions’ work on DC quality standards.”
Independent governance committees
The government’s latest measures include the introduction of independent governance committees (IGCs), to be set up by the providers of contract-based schemes. From April 2015, IGCs will have the power to raise any concerns with members, employers and the Financial Conduct Authority.
The government is currently consulting on proposals requiring trust-based schemes, from April 2015, to consider and report against the quality standards. New measures will also be introduced to strengthen independent governance of master trusts. The consultation closes on 15 May 2014.
The government wants its new standards to apply to all DC pension arrangements to ensure those running schemes understand and consider the key components of scheme quality and have members’ interests as their priority.
Evershed’s Swift says: “This is kind of covering what the TPR code covers, but it does increase governance requirements.”
The NAPF’s Wilson adds: “There are things people scratch their heads about, especially the value for money review that they have to do, but now the government has changed everything again. There is an air of uncertainty about which guidance to follow.”
Minimum quality standards across all schemes set out by the government:
- All schemes must be governed by a body with a duty to act in members’ interests.
- The governing body must be able to freely exercise its duty to act in members’ interests and must be able to explain how any conflicts of interest are handled.
- The majority of individuals, including the chair, of the governing body must be independent of the pension provider.
The governing body must consider:
- The design and net performance of default investment strategies.
- Standards of administration.
- Charges borne by scheme members.
- Costs incurred through investment of pension assets.
The governing body must have, or have access to all the resources, knowledge and competencies necessary to run the scheme properly.
The chair of the governing body must produce an annual report explaining how the scheme has performed against the quality requirements.