The Pensions Regulator has published its regulatory guidance for defined contribution (DC) pension schemes to sit alongside its DC code, which came into effect on 21 November.
The code, which was consulted upon earlier in 2013, sets out practical guidance on how pension trustees can meet the underlying requirements of pensions legislation.
The code was laid before Parliament and the Northern Ireland Assembly in July 2013.
To coincide with the code coming into effect, TPR has also published a suite of information, including its compliance and enforcement policy for DC casework and updated good practice guidance on areas not covered by the code.
From 2014, TPR plans to undertake thematic reviews of the extent to which trust-based DC schemes are compliant with pensions legislation and associated good practice in different areas. Where necessary, it will take enforcement action to address breaches in the underlying law.
In 2014, TPR also intends to publish a template ‘comply or explain’ governance statement that DC trustees can use to inform scheme members, the employer and TPR whether they meet its six principles and 31 quality features for DC schemes, which it published in January 2013.
Andrew Warwick-Thompson (pictured), executive director for DC, governance and administration at The Pensions Regulator, said: “From today, we expect DC trustees to assess their scheme against the standards set out in the DC code.
“Our aim is to protect retirement savers and to ensure their money is invested in good quality schemes that are well-run in the members’ best interests.
“Schemes that fall short of these standards should expect some difficult questions, and they may incur enforcement action in order to rectify breaches in pensions law.
“We also urge professional advisers to familiarise themselves with the details of the code and guidance, as they have a key role to play in helping trustees review their scheme and make improvements to its quality where necessary.”
Increased focus on DC pension schemes has never been more crucial. The number of DC members, total DC contributions and DC assets are increasing at an exponential rate, yet the level of understanding and engagement of people in DC schemes seems to remain stubbornly low.
DC members need some help, and the regulator’s clarification today of its expectations should be the kick start that is needed to help make DC schemes better and get people further up the good outcomes ladder.
The code and guidance is an important step in addressing the governance issue, but it is important that trustees do not view it as a ‘tick the 31 boxes and move on to something else’ exercise. The greatest value (and ultimately best member outcomes) will be achieved where this new guidance is incorporated into an ongoing programme of assessment, alignment of the DC and corporate strategy with scheme-specific objectives and success factors, and then periodic reviews to ensure the desired progress is being met within agreed timescales.
Notwithstanding the fact that legal and compliance duties must be adhered to immediately, arguably it is the practices above and beyond the core legal duties that bring the greatest value, return on investment and, ultimately, improvement in member outcomes. Consequently, DC schemes may take a while to develop to their full potential, although some are already higher up the ladder than others. The code and guidance published today acts as a good catalyst to facilitate this.
The DC code is a big step for the pensions industry. Now that the DC code is in force, trustees will need to take swift action to address their scheme’s ability to comply fully with the code.
The results of our poll at the NAPF Annual Conference and on the PMI website showed that 25% of schemes consider that they are not compliant with the code – those schemes will need to take action now.
We expect most well-run schemes will meet the majority of these requirements but expect that, with a constantly changing regulatory landscape, some will have a few gaps to address. For those that do not meet the required standards, The Pensions Regulator has a number of enforcement powers, from issuing improvement notices to civil penalties of up to £50,000.
For the first time, the DC code sets out The Pensions Regulator’s clear expectations for how DC schemes will be governed within their statutory framework. Following the recent OFT market study on DC pensions and the government’s consultation paper on charging, the pensions regulator’s DC guidance is also likely to attract significant attention.
Trustees can often address costs and value-for-money issues directly if they are parties to a particular contract for services. Here, the DC guidance provides a helpful level of detail around how to carry out an effective review. It is more difficult, however, to take action where a trustee’s role is limited, either by the scheme rules or because the services under review are engaged by the employer or other provider.
The revised DC guidance recognises these specific limitations of a trustee’s role. However, the guidance is not enforceable because there are currently no statutory requirements around value for money and The Pensions Regulator has no power to conduct risk-based assessments. The government may need to legislate to addresses this regulatory gap and enable trustees or The Pensions Regulator to take meaningful action.
We welcome this guidance from TPR, much of which is as per previous drafts that the industry has seen. Most of all, we welcome the increased clarity that the guidance provides.
One of the key areas on which it focuses is the at-retirement process, which looks at the purchase of annuities and on supporting members who make full use of the open market option. The guidance does acknowledge that there are other options available to members, including income drawdown and deferring taking your pension. However, it does not go into any detail on these areas, which is a pity given the way both the number and the size of DC pots are growing. Drawdown is becoming an increasingly used and relevant option for pension scheme members and, in our experience, trustees are looking for more guidance on this area and that need is only likely to increase.
Today’s code of practice is good news for retirement savers. DC needs to shake off the perception of being the poor relation of DB, and a key element of this is to demonstrate to members that DC schemes adhere to the very highest standards and quality features.
The regulator has rightly focused on the need to provide DC pensions that are good value for money. We agree that high charges eat into your pension pot and that’s why we support a cap on charges. There is absolutely no reason why some scheme members should languish in high-charging, legacy funds.
Similarly, The Pensions Regulator is right to expect trustees to shop around for the best deal for their members. Consumers shop around for everything else in life, from car insurance to their next holiday. There is no reason why trustees shouldn’t shop around too.
We have been working with DC trustees for many years on how to ensure that their schemes are high quality, well run and represent members’ best interests. We look forward to working with trustees further to ensure that all aspects of the code and guidance are implemented. DC is the future so it is essential that we get this right and deliver good outcomes for members.