The Regulator’s new DC Code of Practice, which sets out the standards that the Regulator expects trustees to meet when complying with the law, has come into force with effect from 28 July 2016. Our November 2015 bulletin summarised the key points to note in relation to the draft DC Code, which only received relatively minor amendments prior to publication.
'How to' guides
The Regulator has developed six ‘how to’ guides to provide practical information and examples of how trustees of trust based schemes providing money purchase benefits (including DB schemes with money purchase benefits, for example AVCs) can ensure that the requirements of the new DC Code are met. The new DC Code and guides are not intended to be prescriptive and they acknowledge that alternative approaches may be more appropriate depending on the complexity of the scheme. Trustees should adopt a proportionate approach. The guides cover the following key areas of the new DC Code:
Guide 1: The trustee board
The composition and organisation of the trustee board is of the utmost importance as it will have a direct effect on how the scheme is governed and how effectively member interests are protected. The Chairman’s role will be critical to ensuring that the trustee board’s knowledge, understanding and skills are used effectively.
The Regulator’s guide suggests that trustees should seek to work with the scheme’s sponsoring employer to review the fitness and propriety of applicants when recruiting trustees. For example by obtaining references of previous experience and undertaking director disqualification, bankruptcy and criminal record checks.
As far as possible, trustee boards should be diverse and well balanced. The Regulator’s guide suggests that relevant factors to take into consideration include the type of trustees, the experience and skill of trustees as well as social demographics.
Guide 2: Scheme management skills
It is important for trustees to regularly review the scheme’s governance framework to ensure that it remains effective and is being implemented in accordance with good practice.
The Regulator's guide sets out key areas that trustees may wish to focus on to achieve good scheme management which include:
- Obtaining and improving knowledge and skills – trustees should have training plans in place to cover key areas of pension scheme management. Any training undertaken should be recorded to ensure that the trustees are obtaining the appropriate knowledge and level of skills.
- Working well with advisers, providers and employees – the trustee board should:
- review new and existing adviser and provider contracts
- monitor adviser and provider performance
- scrutinise and, where appropriate, challenge advice received from advisers and providers
- have regular contact with the scheme employer and encourage them to have an active role in running the scheme.
- Conflicts of interest – the trustee board should have a conflict of interest process in place to identify and manage any conflicts of interest including trustee, service providers and advisers.
- Risk management – the trustee board should have a framework in place to help trustees identify risks which could have a material impact on the scheme’s ability to provide member benefits if they are not managed effectively. Suggested ways to manage risks include having a scheme risk register to record potential threats, evaluate risks, to document who is accountable for managing the risks and, where appropriate, to establish mitigation strategies.
Guide 3: Administration
Good scheme administration is essential as administration is the function through which a large proportion of trustee duties are carried out and it is the direct link that members will have with the scheme.
The Regulator’s guide suggests that good administration relies upon:
- effective engagement between the trustee board and the administrators (whether a third party or in-house team)
- the trustee board facilitating a good working relationship between the employer and the administrator
- obtaining administration reports which cover key administration information such as member statistics, risk reporting, reporting against service level agreements, cash flow reporting etc
- the trustees ensuring that the administrator has sufficient training and experience
- ensuring that administration procedures are clear and that procedures are well documented and incorporate quality assurance and consistency
- have disaster recovery and a business continuity plan in place which set out what actions would be taken if specific events take place that could have an impact of the running of the administration of the scheme.
Trustees should also consider implementing protocols and procedures for the processing of core financial transactions and to monitor the accuracy of data and efficiency of record keeping.
Guide 4: Investment governance
The trustee board has the ultimate responsibility for scheme investments and therefore trustees should ensure that they retain effective control when delegating investment tasks to third parties.
The Regulator’s guide suggests that the trustee board should have a clear investment delegation structure in place to ensure that:
- there is an appropriate balance between efficiency and checks and balances to ensure that any actions taken are appropriate
- delegation of fiduciary management
- all parties involved in the scheme investments are clear on their roles and responsibilities.
The guide provides that trustees should consider membership needs as well as financial and nonfinancial factors which are material to the performance of an investment, including sustainability, investment stewardship and clear objectives and strategies in relation to accumulation and decumulation.
Strategy performance, monitoring and review have also been identified as areas that trustee boards should focus on and in particular the fund scale, self-select options and market development as well as the appropriate form or review to be undertaken.
Guide 5: Value for members
Members of money purchase schemes rely on others to make decisions about their fund and to deliver and assess value for members. The Regulator’s guide sets out the key points that trustees should consider before carrying out its value for member assessment which includes:
- the fact that all members should receive value for money
- the trustee board should develop their own policy to assess value for members
- the trustee board should consider the quality and scope of scheme provisions as well as the cost
- an understanding of scheme costs and what is provided for those costs in comparison to what is available on the market.
The guide includes an illustrative approach which trustees may wish to follow to ensure that they comply with their legal duties and meet the standards of the DC Code. It suggests that trustees should:
- gather information on what the scheme provides for members and at what cost
- assess the scope and quality of scheme services to members and evaluate that against the cost
- report on the outcomes and take action to address poor value.
Even where trustees can report confidently that member-borne costs and charges in the scheme represent good value, trustees should undertake ongoing monitoring and evaluation.
Guide 6: Communicating and reporting
The Regulator’s guide on communicating and reporting highlights the importance of trustees:
- knowing their members and seeking their views. For example, through member surveys and other member engagement initiatives such as workshops, AGMs or focus groups
- communicating key information to members clearly and in plain English
- undertaking member reporting through the annual chairman’s statement.
The recommendations and guidance in the new DC Code and ‘how to’ guides are not legally binding and there is no penalty for failing to comply. The Regulator makes it clear that the new DC Code and guides are not intended to be prescriptive and that alternative approaches may be more appropriate. However, best practice will be for trustee boards to consider the new DC Code as it, coupled with the guides, sets out actions and behaviours that the Regulator considers will demonstrate compliance with the law.