On 9 May 2016, the Pensions Regulator laid before Parliament the final draft of its revised code of practice no. 13: Governance and administration of occupational trust-based schemes providing money purchase benefits. The code sets out the expected conduct and practice for occupational pension schemes offering any defined contribution (DC) benefit.
It was prompted by the new legal requirements for certain DC schemes which came into force in April last year, regarding governance standards, charge controls and communications on pension flexibilities. The Regulator has also consulted separately on a series of ‘how to’ guides to support the new code. The code and guides are expected to come into force in July 2016. As the Regulator continues to focus heavily on raising DC governance standards, trustees are advised to engage with the new materials at the earliest opportunity.
Who is the code for?
The code applies (where relevant) to trustees of all occupational trust-based pension schemes with two or more members which provide some form of money purchase benefit, including:
- DC schemes and DC sections within hybrid schemes;
- master trust arrangements;
- money purchase additional voluntary contributions (AVCs) within a defined benefit (DB) scheme; and
- DB schemes with a money purchase underpin, to the extent the legislation applies to them.
The code does not clearly label which parts apply to different types of schemes. The Regulator has said that it expects trustees to know when the law applies to their scheme or to seek professional advice, and consider additional training, if they are unsure.
Contents of the code
The code is divided into six sections which set out the standards of conduct and practice that the Regulator expects trustee boards to meet in complying with their duties in legislation. The Regulator has changed some of the language in the code, using ‘the law requires’ to reference a legal requirement on trustees and ‘we expect’ to distinguish a standard of conduct and practice.
Below we highlight some of the new content by reference to the six sections of the code.
Trustees are expected to:
- Trustee board
- treat the three-month timescale for appointing a chair (which does not apply to AVC-only schemes) as a longstop and aim to appoint a new/replacement chair as quickly as possible;
- put in place a documented appointment process which considers candidates’ leadership and ability to drive good practice; and
- in respect of relevant multi-employer schemes (broadly, where participating employers are not connected, including master trusts), meet additional standards regarding who sits on the board, how they are appointed and how members’ views are taken into consideration.
- Scheme management skills
- regularly discuss key risks and issues, including topics on which trustees must report in the annual chair’s statement and the extent to which the scheme is meeting the standards set out in the code; and
- in addition to the scheme rules, have a working knowledge of any policies and practices in relation to the scheme, such as limiting the number of lump sums that can be taken.
- where they have the power to do so, shorten the amount of time taken to process core financial transactions (using electronic means of processing wherever possible);
- where the law sets a timescale for a particular transaction, treat this as an absolute maximum; and
- where a scheme does not operate daily dealing, invest funds on the next available dealing date and within a maximum of five working days (increased from three following consultation feedback).
- Investment governance
- take regular steps to engage with members about when/how they may wish to take their DC benefits and use this to inform the investment options;
- where contributions are being paid into a different arrangement without members making a choice, consider whether the original choice extends to the new arrangement; and
- where it is not immediately obvious whether arrangements within a scheme are default arrangements, seek professional advice to understand how their scheme is affected.
- Value for members
- follow the Regulator’s approach to the new requirement to assess value for members - this does not necessarily equate to ‘low cost’ but that the combination of charges and what is provided in respect of them should be appropriate for the scheme membership as a whole, when compared to other options in the market;
- make efforts to understand the characteristics of their members, their preferences and financial needs;
- focus on elements of scheme provision for which members bear the cost; and
- document and take steps to improve areas which do not currently provide value for members.
- Communicating and reporting
- where the law requires certain information to be provided in a particular communication, consider what additional information or explanation members might need to make informed decisions about their benefits;
- contemporaneously document and evidence actions explained in ‘risk warning’ statements; and
- produce an annual chair’s statement (replacing the voluntary governance statement which measured performance against 31 DC quality features set out in the original code).
‘How to’ guides
The revised code is around half the length of the original code published in 2013 with much of the practical guidance and examples of best practice now contained in six ‘how to’ guides (which correspond to the six sections of the code). While the code sets out the standards to be met when complying with the law, the guides provide practical information, illustrative approaches, checklists, ‘key questions’ and examples of best practice to demonstrate how to meet the standards in practice, although they are not intended to be exhaustive. They also include useful additional resources, such as an example risk register in the scheme management skills guide and generic risk warning text in the communicating and reporting guide.
Consultation on the draft guides closed on 11 May 2016 and final versions are expected to be published when the new code comes in force.
We welcome the Regulator’s efforts to equip trustees with the updated guidance and practical tools they need to further improve DC governance standards. However, trustees must remember that failure to meet the standards set out in the new code may result in penalties. Separately, the Regulator has recently consulted on a bolstered compliance and enforcement policy for DC schemes.