Going for gold standard governance: What is on the agenda for DC trustees?

21 November 2013

The Regulator's new Code of Practice No. 13 "Governance and administration of occupational defined contribution (DC) trust-based pension schemes" came into force today.

The Code applies to trustees of all occupational DC trust-based pension schemes with two or more members. It covers schemes which provide only DC benefits, and also the DC element of hybrid schemes and DC additional voluntary contributions (AVCs) under a defined benefit (DB) scheme.

The Regulator has said that it will take into account whether trustees are complying with the Code when deciding whether to take action under its new compliance and enforcement policy.

Finalised guidance to accompany the Code was also published today.

The Regulator's new Code of Practice

The Regulator's new Code of Practice No. 13 "Governance and administration of occupational defined contribution trust-based pension schemes" came into force today.

The Code applies to trustees of all occupational defined contribution (DC) trust-based pension schemes with two or more members. It covers schemes which provide only DC benefits, and also the DC element of hybrid schemes and DC additional voluntary contributions (AVCs) under a defined benefit (DB) scheme.

Finalised guidance to accompany the Code was also published today.

Governance principles

"Good governance matters because occupational DC trust-based pension scheme members entrust their savings into the hands of others. The decisions and actions of trustees, and those to whom they delegate responsibilities, are key to the outcome that members of occupational DC trust-based pension schemes receive from their scheme." The Pensions Regulator

The Regulator has said that trustees should adopt six DC principles during the design, set up and on-going operation of a scheme. Two of the six principles relate to governance:

Principle 2: Establishing governance - A comprehensive scheme governance framework is established at set up, with clear accountabilities and responsibilities agreed and made transparent.

Principle 4: On-going governance and monitoring - Schemes benefit from effective governance and monitoring through their full lifecycle.

What is on the agenda for DC Trustees?

According to the Code, the agenda for a DC Trustee meeting should look something like this:

Meeting of the Gold Standard Trustee Board

  • Conflicts of interest (trustee and adviser)
  • Review and update risk register
  • Investment monitoring (including presentations from fund managers and report from any sub-committee)
  • Review scheme costs and charges
  • Administration (including a report from the scheme administrator)
  • Member communications
  • Legal update (legislation, case law, regulatory guidance and decisions of the Pensions Ombudsman)
  • Trustee training (ideally an hour)
  • AOB

Taking each of the above agenda items in turn, the Regulator has provided the following practical guidance to achieving good governance:

Conflicts of interest

The first agenda item for most trustee meetings is conflicts of interest. This is as important for DC schemes as it is for DB schemes.

The Regulator recognises that DC trustees may not face the same funding issues which can cause conflicts in the context of a DB scheme. However, specific areas to watch out for in a DC context are:

  • When the trustees are agreeing costs with the employers.
  • When a trustee is an employee of the organisation providing the pension product i.e. where the scheme has been set up by an insurer or other third-party commercial provider.
  • Adviser conflicts e.g. when advisers refer the services or products of related parties.

Trustees should have in place a conflicts policy and a register of interests (which will also cover adviser conflicts).

Before they are appointed, all trustees, advisers and providers should declare any potential conflicts. On-going declarations should be made at the start of each trustee meeting. Potential conflicts of interest should be addressed in contracts with advisers and providers.

The trustee board should also carry out advance planning to consider what, if any, conflicts may come up in the year ahead.

Risk register

Trustees must establish an internal controls framework specific to DC issues. The Regulator has identified the following areas of risk for DC schemes:

  • Fraud (including pensions liberation fraud) and the importance of independent oversight.
  • Investment - underperformance by managers, insolvency of managers.
  • Management of costs and charges.
  • Administration - misallocation of contributions, failure to process switches between funds.
  • Regulatory requirements - scheme accounts must be finalised on time and annual benefit statements issued in accordance with legal requirements.
  • Operational procedures - failure by service providers, key personnel leaving.
  • Communications - members do not have sufficient information to help them make good decisions.
  • Corporate activity - leading to the closure of the scheme or a bulk transfer.
  • Retirement and members' decumulation options- members must be provided with their options in the lead up to retirement.

Trustees can identify the risks specific to their scheme through internal audit reports, complaints, administration reports and external audit reporting.

Investment monitoring

This agenda item will take up a significant part of any DC trustee meeting. It encompasses setting investment objectives and the default strategy, security and liquidity of assets, reviewing investment fund performance and general investment decision making.

From a legal perspective, trustees should be aware what powers of investment they have under the scheme rules and their legal duties in relation to investment. The Code states that trustees should also give consideration to the security of their investments.

Would members be covered by the Financial Services Compensation Scheme? What protection do the trustees have under the contractual agreements in place with investment providers? What would happen on the insolvency of an investment provider? These are all questions that the Regulator wants DC trustees to consider on an on-going basis.

The Wragge & Co Pensions team is planning a further alert in the new year dealing specifically with DC investment issues and the default fund.

Scheme costs and charges

Under this agenda item, trustees should review the services and benefits provided to members and the costs incurred by members.

The Regulator states that trustees should act as demanding consumers on behalf of their members. Trustees should challenge their service providers to provide better services and reduce costs where possible.

Administration

The Regulator has said that trustees of occupational DC trust-based schemes should conduct a data review exercise annually or at other intervals that they consider appropriate for their scheme. In addition, trustees should ensure that data is monitored on an on-going basis.

A key aspect of good administration is ensuring that all financial transactions are processed promptly and accurately e.g. receipt of contributions, member fund switches, investment and disinvestment of assets, benefits payable on death and transfer values.

Where administration has been outsourced, trustees should regularly review service levels to ensure that they remain up to date.

The Code states that trustees must ensure that they understand their obligations under the Data Protection Act 1998 and the legal requirements in relation to the deduction and payment of member contributions. These could be areas where trustee training is required (see later in the agenda). See our alert on data protection from a DC perspective.

Communications

For each and every member communication, it is good practice for trustees to ask themselves the following questions:

Is it accurate? It goes without saying that the information provided has to be accurate.

Is it clear and understandable? Trustees should think about their audience and their financial literacy.

Avoid jargon. One suggestion from the Regulator is to test a communication on a small number of members before issuing to the whole membership.

Is it engaging? A communication should be engaging so that it grabs the member's attention.

Does it contain the right information? Too much information can be counter-productive. Communications should be tailored to specific groups of members. The Regulator states that clear sign posting should be used.

Is it the right time? For example, a reminder to members about increasing contributions might coincide with pay day, the day when bonuses are received or the end of the tax year.

Is it the right channel? Communications do not have to be elaborate, glossy or costly. The Regulator says that trustees should think about the most appropriate channel e.g. website, email, webinars, podcasts and text messages. In this context trustees should consider their disclosure obligations under the new Regulations due to come into force next April.

Legal update

Trustees need to understand any changes in the law including legislation, case law and determinations of the Pensions Ombudsman which affect DC provision. An example of a current topical issue is auto-enrolment.

Trustee training

The Regulator recommends that trustees should maintain a training log.

The training programme should cover setting an investment strategy, how to select appropriate fund options, how to monitor adviser and service provider performance, administration, balance of powers under the scheme rules, decumulation issues and understanding how core scheme events could operate e.g. a merger or a closure.

The Wragge & Co Pensions team is planning a further alert in the new year dealing specifically with decumulation issues.

Trustees must be clear what benefits their scheme provides and be familiar with key provisions such as the investment power and the definition of pensionable pay.

Meeting closed

After the meeting has closed and everyone has gone home, it is important to ensure that a detailed set of minutes is drawn up, the conflicts and risk register are updated and everyone (trustees and advisers) is clear on what they need to do before the next meeting. The Code states that trustees must keep written records of meetings covering all of the decisions made.

Maintaining accurate records will help the trustees should they be required to answer any enquiries from the Regulator under its new DC compliance and enforcement policy.

For more information, see our alert from July on the Code more generally, and our alert on the draft policy.

Wragge & Co will be hosting a webinar on the latest DC developments on Thursday 5 December. Partner Jane Kola will be joined by Richard Birkin, director at KPMG. For more details contact Sara Dolan +44 (0)121 260 9842.


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