On 24 November the Pensions Regulator published for consultation a new code of practice on governance and administration of occupational defined contribution schemes. The code will replace the existing code published in 2013. The need for a new code has been prompted by the introduction of new charging and governance requirements (covered in our December 2014 update). The proposed new code is significantly shorter than the current one, and the Regulator has altered some of the terminology in the code to make clear when it is referencing a statutory requirement and when it is setting a standard that it expects all relevant schemes to meet. The Regulator intends to publish related guidance in separate documents.
The code applies (at least in part) to all occupational trust-based pension schemes with two or more members where the scheme provides money purchase benefits (including money purchase AVCs).
In view of the new legal requirement for relevant schemes to produce an annual chair's statement on governance, the Regulator will no longer expect schemes to produce a voluntary governance statement demonstrating how the scheme has performed against a list of DC quality features.
The code is split into the following sections:
- The trustee board;
- Scheme management skills;
- Investment governance;
- Value for members; and
- Communicating and reporting.
Much of the code's content covers similar ground to the existing DC code. The following points are worth noting:
The trustee board
- Trustee boards are expected to have a documented process for appointing a chair. The three month period for appointing a chair is to be regarded as a longstop – trustees are expected to appoint a chair as quickly as possible.
- The code contains details of the Regulator's expectations in relation to "relevant multi-employer schemes" (broadly, multi-employer schemes whose employers are not associated with each other) regarding their obligation to appoint "non-affiliated" trustees.
Scheme management skills
- Trustee knowledge and understanding requirements require trustees to have a working knowledge not just of their scheme's rules, but also of policies and practices, for example a policy restricting the number of lump sums which a member may take from the scheme.
- Trustees are expected to consider the administration of the scheme as a substantive item at every regular trustee meeting.
- Trustees are expected to have procedures in place to enable a continuous and consistent service in the event of a change of administrator or change in personnel at an existing administrator. The draft code states that for many schemes this is likely to include a manual that sets out the procedures to follow when administering the scheme.
- Where trustees have the power to amend processes which affect the timescale for processing core financial transactions, they are expected to take steps to shorten the time taken to process such transactions, for example if developments in technology enable this.
- The Regulator expects trustees to use electronic means to process financial transactions wherever possible. Cheques should only be used in exceptional circumstances.
- Where the law sets out a timescale for completing a task or transaction, the Regulator expects trustees to treat this as setting an absolute maximum timescale. Statutory timescales should not be treated as an indicator of what is "prompt".
- In all cases the Regulator expects trustees to ensure that scheme contributions are invested within a maximum of three working days following receipt of the contributions and completion of a reconciliation exercise. Where discrepancies in contribution reconciliations arise, only the unreconciled contributions should be held pending reconciliation, with the remainder invested accordingly.
- Trustees are expected to carry out a data review exercise at least annually.
- Trustees are expected to regularly take steps to engage with members about the date they may wish to take their benefits and any preferences they have about how to take their DC benefits, eg the likelihood of them wishing to gain flexible access to their benefits.
Value for members
- The code sets out the approach trustees are expected to take when assessing whether an arrangement provides value for money for members.
- In calculating whether default arrangements are compliant with the charge controls, trustees are expected to seek professional advice "in all but the most straightforward of cases".
- Trustees should make members aware of the right to transfer their benefits to another scheme at any age in order to access their benefits in a way other than through purchase of an annuity, regardless of whether the scheme itself offers flexible access to benefits.
Communicating and reporting
- When issuing statutory money purchase illustrations, trustees should consider making members aware of their options for accessing flexible benefits.
- Trustees should include clear information on how to spot a pensions scam in all relevant communications to members, including the "wake-up pack".
- The annual chair's statement should be written in a way that provides a "meaningful narrative" of how, and the extent to which, governance standards have been complied with.