The Pensions Regulator is consulting on a revised Code of Practice on the governance and administration of occupational pension schemes that provide DC benefits. The draft of the new Code responds to some of the criticism of the previous version and reflects changes required following the DC flexibilities and related governance legislation introduced in April this year.
Why a new Code?
The original Code came into force in November 2013, as part of the Regulator’s renewed DC governance drive. However, its thunder was stolen when, in the March 2014 Budget, the Chancellor of the Exchequer unfurled radical changes to DC benefits, including the power to cash them out. A week later, the Government announced a raft of new DC governance legislation to take effect from April 2015. This set out minimum quality standards for core financial transactions in occupational schemes, as well as requiring schemes to produce an annual Chair’s Statement recording their compliance with the new regime.
Even aside from the need to address these developments, there had been concern within the pensions industry that the original Code - which was 56 pages long, and required trustees to benchmark their progress alongside no fewer than 31 “quality features” - was excessively prescriptive and bureaucratic.
The essence of the Code
The revised draft updates the Code to include reference to the April 2015 changes in tax and law affecting DC benefits. It has also been shortened and simplified, no longer setting out a long list of quality features or the detail of the law relating to this area. Instead, the intention is that the Regulator will supplement the Code, in due course, with further ‘how to’ guidance.
The draft Code is split into six broad sections, dealing with:
- The trustee board (chairs of trustees, member nominated trustees, and master trusts);
- Scheme management skills (managing risk, knowledge and understanding, and conflicts of interest: this includes a renewed focus on service providers and understanding their terms and conditions, as well as understanding and reviewing all policies and practices the trustees might have in place);
- Administration (core financial transactions and record-keeping) – good administration is “the bedrock of a well-run DC scheme”, and it should be a substantive item at every trustee meeting;
- Investment governance (including investment strategies, and security and liquidity of assets);
- Value for members (including restrictions on costs and charges); and
- Communicating with, and reporting to, members (note that all communications to members should be “accurate, clear, relevant and provided in plain English”).
A few points to note
The Code applies not just to DC schemes, but to DC benefits such as AVCs and money purchase underpins in defined benefit schemes.
The draft Code makes a number of governance points arising from the new DC flexibilities: for example, it specifically links engagement with members about how they use, or may wish to use, DC flexibilities, with the investment options that trustees consider providing. It also incorporates content from the Regulator’s stopgap “essential guide” on trustees’ disclosure obligations and Pension Wise.
Other sections deal with the Regulator’s approach to the new legal requirements. The Regulator expects the Chair’s Statement to provide “a meaningful narrative”, clearly setting out the measures taken to achieve compliance and the detail of how such conclusions were reached. Another passage fleshes out the new requirement to process core financial transactions promptly and accurately, as well as defining them as “all transactions which relate to the handling of member and employer contributions, and assets relating to those contributions, once they have been received by the scheme”.
Trustees should note that whilst processing ‘promptly’ generally means doing so without “undue delay”, the Regulator has more precise deadlines in mind for some tasks: contributions, investments and all records relating to them must be reconciled at least monthly, and all contributions must be invested within three working days. The Regulator also states that trustees should see time limits set out in legislation as “absolute maximums”.
The above is only a summary, however. There are likely to be a number of additional actions for trustees arising out of the new Code including from the Regulator’s restated expectations in relation to third-party contracts, scheme administration, member protection and retirement planning.
Action for trustees
Although Regulator Codes of Practice are not legally binding, a court must take their provisions into account when determining whether legal requirements have been met. Trustees of all schemes which offer DC benefits (including AVCs) may therefore wish to review the new draft and consider whether their current arrangements comply.
Once the Code becomes effective (expected to be next May), all trustees are likely to need to work through the Code and identify any areas where their current governance arrangements fall short of what the Regulator expects.
The draft Code can be found here and consultation closes on 29 January 2016.