This article summarises the main features of DC arrangements, and the ways in which they are regulated and governed, to help you understand what running your DC scheme involves.
Currently more than 12 million UK private sector employees are building up pension benefits on a defined contribution (or money purchase) basis and they are generally doing so in one of three different types of arrangement.
Which type do you offer your employees – and would it be helpful to understand a little more about the governance and administration requirements that apply to your particular arrangement?
In broad terms, the three different types of DC arrangement are:
- contract-based schemes, such as group personal pension plans (or ‘GPPs’),
- trust-based arrangements for non-associated employers, ie master trusts, and
- employers’ own, trust-based arrangements (for them and their fellow group companies).
A GPP is really just a collection of contracts between the provider of the GPP (which, invariably, will be an insurance company) and each individual member of the GPP him/herself.
Where an employer offers employees access to a group personal pension plan, the employer is essentially facilitating the creation of those contracts. It will generally have gone through a process of selecting and appointing the provider, before then going on to effectively refer its employees to it (paying over the required amount of contributions from time to time).
If you offer employees access to a GPP and remain satisfied with your chosen provider, there will, in high-level terms, be relatively little for you to do into the future, other than continue to ensure the required contributions are paid over.
The insurance companies by which GPPs are normally created and operated are regulated by the Financial Conduct Authority and so are subject to the requirements of the FCA rule book in carrying out their business.
There has also, in recent times, been a requirement for every provider of a contract-based arrangement of this kind to put in place an Independent Governance Committee. This group of individuals is responsible for reviewing the provider’s charges, and general administration and governance standards, and forming views on the extent to which the GPP delivers value for money.
These are occupational pension schemes set up and run by specialist providers who are independent from the employers participating in them (although they can often be labelled so as to carry the employer’s brand, etc). They are established under trust, and so, unlike contract-based schemes, they are regulated by the Pensions Regulator rather than the FCA, and they require more employer involvement than a GPP (but less than a trust set up by the employer itself).
There are several different types of master trust provider – some are insurance companies, others are firms of specialist pensions administrators and investment experts; some are industry bodies, others have entered the market solely for the purpose of being a master trust provider; and then there is NEST, with its universal service obligation.
As these arrangements are set up under trust, their assets are held and invested by trustees and so they are kept legally separate from the assets of the providers (and participating employers). While the nature of the product is that the scheme’s trustees typically use the provider’s administration and investment platforms, the trustees must not be legally bound to do so and there are statutory requirements that ensure a certain level of independence on the trustee board.
Being governed by the legislation applicable to occupational pension schemes and regulated by the Pensions Regulator, master trusts are subject to largely the same requirements as those which apply to DC “own trust” schemes – including the Regulator’s new Code of Practice (see below). They can also apply for accreditation under the Regulator’s master trust assurance framework.
Employer “own trust” schemes
These arrangements are generally set up exclusively for employees (or former employees) of a particular employer (and other companies in the employer’s group). They are occupational pension schemes established under trust and so, like master trusts, they are administered by trustees who are legally independent from the employer (albeit that the employer is responsible for selecting and appointing employer-nominated trustees and appointing member-nominated trustees).
Unlike a master trust, an “own trust” scheme is not run with the commercial objective of making a profit (by keeping the costs of delivering the services below the charges paid by members and participating employers) and so they tend to be perceived as involving greater levels of employer paternalism. Certainly, they will almost always be customised to the employer and named after it.
“Own trusts” are subject to broadly the same legislative regime as master trusts although, of the three types of DC arrangement described here, they typically require the highest degree of employer involvement. For example, according to the Regulator’s new Code of Practice on the governance and administration of these schemes (Eversheds’ checklist for which can be accessed here):
- DC scheme trustees must have, and be able to demonstrate, the skills, knowledge and understanding needed to run their scheme effectively – since an “own trust” employer is normally responsible for appointing trustees, this is something it needs to be mindful of
- DC scheme trustees are expected to work with the scheme’s employer to ensure the employer understands its responsibilities towards the scheme and meets them – “own trust” employers should therefore not necessarily be surprised if their trustees start a dialogue with them on these issues
- trustees need to ensure that member records, contributions and investments are reconciled at least monthly and that any discrepancies are resolved promptly – employers can expect swift contact from trustees if anything goes awry with member data or contributions (and the same will likely apply for those using a master trust)
- communications with members must provide the information they need to make informed investment decisions, and engagement with members on their retirement options must be regular and must explain the steps they can take to make informed decisions – this is something to be borne in mind by employers using either sort of trust, given all active members will be current employees
- the chair of trustees needs to give a governance statement in the scheme’s annual report and accounts which explains how the trustees have assessed the extent to which member-borne costs and charges represent good value – action may well be needed from an “own trust” employer if its trustees conclude that steps need to be taken to ensure good value.