Following a period of consultation, the Pensions Regulator has published a revised code of practice for trust-based DC schemes.
The introduction of auto-enrolment has encouraged a continued focus by the Regulator on DC schemes. With millions of people now being automatically enrolled into a DC scheme, it is vital that these schemes are capable of delivering good member outcomes and the Regulator believes that the best way to achieve this is by adhering to the quality features set out in the new code.
The code is based on the Regulator’s existing six DC principles:
- Essential characteristics: schemes are designed to be durable, fair and deliver good outcomes for members
- Establishing governance: a comprehensive scheme governance framework is established as set up, with clear accountabilities and responsibilities agreed and made transparent
- People: those who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them out
- Ongoing governance and monitoring: schemes benefit from effective governance and monitoring through their full life cycle
- Administration: schemes are well administered with timely, accurate and comprehensive processes and records
- Communication to members: communication to member is designed and delivered to ensure members are able to make informed decisions about their retirement savings
These principles are underpinned by 31 DC quality features that provide more detail about the activities, behaviours and control process that are more likely to deliver good member outcomes.
The code is split into five core sections with each section setting out the quality features and legal requirements that trustees need to be aware of and providing practical guidance on how they can meet these requirements.
- Know your scheme
The Regulator states that in a quality scheme, trustees will understand their duties and be fit and proper to carry them out, and will ensure that sufficient time and resources are identified and made available for maintaining the ongoing governance of the scheme. By way of example, in order for trustees to meet this standard they must have knowledge and understanding of the law relating to pensions and trusts, be conversant with (i.e. have a working knowledge of) their scheme documents and be able to understand and challenge any advice they are given. The Regulator expects trustees to review their skills and knowledge and undertake training on a regular basis.
- Risk management
Trustees are expected to establish and maintain adequate internal controls which mitigate significant operational, financial, regulatory and compliance risks. Any risks which may have a material impact on the scheme’s ability to provide member benefits (such as fraud (including pensions liberation), investment and management of costs) should be identified. Identified risks should then be evaluated using an appropriate process based on the impact on the scheme and the likelihood of the risk materialising (for example, by using a traffic light system) and then managed accordingly.
The Regulator expects trustees to ensure that the number and risk profile of investment options offered reflect the needs of the membership and that the investment objectives for each investment option are identified and documented in order for them to be regularly monitored. The code emphasises the importance of setting a default strategy and designing it with the needs of the particular membership in mind. Trustees should understand and monitor the member-born costs of the default strategy and should seek to achieve equity between active and deferred member charges.
- Managing conflicts and monitoring advisers and service providers
Trustees should be able to effectively demonstrate how they manage conflicts of interest and should put in place arrangements to mitigate the impact to members. Conflicts can apply to trustees, service providers and scheme advisers. The Regulator also states that Trustees should regularly review the effectiveness and performance of the services offered by scheme advisers and service providers. This should include establishing what professional indemnity cover they have and ensuring that a clear and comprehensive contract is drawn up setting out the terms on which they are appointed.
The code confirms the existing Regulator’s guidance on scheme record-keeping and confirms that trustees should ensure that member data across all membership categories is complete and accurate and is subject to regular data evaluation. Trustees should support employers in understanding their responsibilities for providing accurate information, on a timely basis. The Regulator also emphasises the importance of having processes in place to record and track the receipt and investment of contributions to the scheme, and ensuring that core scheme financial transactions (such as transfers, investment/disinvestment, payment of death benefits, etc) are processed promptly and accurately.
The new code of practice is due to come into effect in autumn 2013 and it is expected that the accompanying DC regulatory guidance and DC compliance and enforcement policy will also be published at that time. Trustees of DC schemes should consider the code and review their scheme and governance arrangements to ensure that they possess the 31 quality features.
The new code of practice can be found here: http://www.thepensionsregulator.gov.uk/docs/draft-code-13-governance-administration-dc.pdf