DC Governance: new guidance from the Pensions Regulator

Defined Contribution (DC) Guidance: does it deliver?

In July 2016, The Pensions Regulator published the new code of practice and the supporting DC guides. The six guides are designed to support trustees in providing information on how they meet the standards of practice expected under the new code. However, do these guides deliver enough support to trustees?  Will there be additional costs to schemes under the new code of practice?

Below we look to answer these key questions, as we place the spotlight on each of the six guides.

The trustee board 

  • It provides guidance on how to assess the fitness and propriety of trustees, the role of the chair, trustee board composition and the conduct and content of board meetings. 
  • It offers a step by step guide in respect of key considerations for trustees, which new or inexperienced trustees in particular would find reassuring.  Furthermore, there is also specific guidance in respect of Master Trusts.
  • Overall, the guide is generalist in its nature and medium to large scheme trustees would find they are covering old ground given that many of these standards will already be implemented. The guidance for the role of the chair is useful and there are also some helpful tips around succession planning.

Scheme management skills

  • Building on the first guide, this one sets out what is expected regarding trustee skills and training. It also looks at ways of managing conflicts of interest and risk management techniques which the board should consider.
    There is practical advice on how trustees should work with and monitor their advisers and service providers as well as useful suggestions on how to engage with the employers, for example in relation to payroll processes or around strategic matters. . 
  • This guide includes a checklist for reviewing contracts which trustees should find useful as well as questions the trustees should consider when selecting a service provider.

Administration

  • This guide covers a wide range of issues including a section on working with the administrator and employer, receiving reports from the administrator, disaster recovery, core financial transactions, service level agreements, transfers and data accuracy.
  • Additional information is set out regarding what is considered to be ‘prompt’ and examples are given in this respect.  It goes on to suggest metrics within service level agreements, in particular asking your service provider to report on certain KPI’s in respect of DC members can add valuable insight to the trustees.  The guide also provides useful considerations in respect of the 3 days contribution invested target which trustees may find helpful. 
  • Examples for the processing of core financial transactions are fairly basic. It is important to perform regular reconciliations between member records and also investment units and investment units held by the trustees that are not allocated to members.
  • The guide does not cover specific timescales around transfers out however we believe that Trustees should establish appropriate timelines that are consistent with their scheme and the needs of their members and these timescales should then be included within the Service Level Agreements.

Investment management

  • This guide covers delegation, stewardship, designing investment arrangements, performance monitoring and review, changing investment funds and security of assets.
  • This guide is more comprehensive than the others and there is some useful content on setting up a new scheme and designing investment options.

Value for members

  • The draft gives useful guidance on how trustees should go about assessing value for members, which helps trustees understand the requirements of the code. 
  • This guide demonstrates a useful illustrative step by step approach with good guidance on transaction costs and active member discounts.

Communicating and reporting

  • This final guide covers 'knowing your members', general communications, retirement communications including new wording for retirement risk warnings and reporting including the content of the annual chair’s statement. 
  • This guide provides helpful clarification on the application of legal requirements for earmarked schemes and schemes in wind–up.

Annual chair’s statement - is something missing? 

Only limited guidance has been given on the completion of the annual chair’s statement. Experience to date has shown that many draft statements appear to be very generic in build and fail to consider areas where the scheme is falling below expectations.  

One of the concerns surrounds the level of trustee engagement in the drafting phase. Trends have flagged that many chairs delegate the responsibility of preparing the statement and are reluctant to highlight any weaknesses in the control environment. This shows a clear divide between those trustees who are engaged and subsequently producing a considered statement in reference to the new code and those with little engagement that see this as a tick box exercise with zero consideration to the revised regulations. 

We are also highlighting to trustees the importance of keeping records to support the statements they have made and this requirement for an audit trail is set out within the guide. We hope that following the consultation, the guide will provide trustees with more detail in this area to enhance the quality of the statements we see. 

Can schemes expect to see additional cost with the new code of practice? 

The consultation process around the guides also asked whether the implementation of the code will lead to additional costs for a scheme. This is certainly an area of debate among trustees.

Overall, it could be argued trustees should not incur significant additional costs in applying the DC code and standards. trustees already have to comply with the legislative provisions relevant for their schemes and the code and guides should add no further burden of compliance as processes and procedures necessary for the application of these codes should already be in place. In practical terms perhaps a wider debate on the funding of DC arrangements is needed. There is also a concern for some trustees around maintaining accuracy of deferred member data.  It may be helpful if the guidance provided practical advice on examples of how to maintain the accuracy of deferred member data, without incurring expensive tracing fees.  

A question arises then as to what ability and powers the trustees may have to fund the requirements that these guidelines set out  – some further research on the obligations of sponsors to meet the costs of adequate funding to meet the standards which are very well documented in the code and the alignment of governance responsibilities and funding obligations in a DC environment may be helpful when application of the guidance is assessed once in force. Ultimately this question will be fundamental to the effectiveness of DC pension provision.

These six guides do provide trustees with a useful framework and insight to the understanding and implementing of the latest DC legislation. Looking ahead, they should be the first port of call for all trustees implementing the code and looking to ensure best practice within their DC scheme.

For more information and to answer any questions you may have, please do not hesitate to get in touch with Karen Tasker directly.