On 11 July 2013, the Pensions Regulator (TPR) published a revised Code of Practice 13: Governance and administration of occupational defined contribution trust-based pension schemes in draft form, following consultation in January 2013.
An increasing number of employees will be automatically enrolled into Defined Contribution (DC) schemes over the next few years. As a result, TPR wanted a framework to regulate the governance and administration of these schemes, to ensure that members are placed in schemes that are durable, well managed and offer value for money.
Therefore, TPR devised this Code of Practice to help trustees meet the legislative requirements for running DC trust-based schemes. The Code applies to schemes with two or more members that provide money purchase benefits (including additional voluntary contributions provided by a defined-benefit (DB) scheme), money purchase benefits with a DB underpin and DC benefits under a hybrid scheme. It doesn’t apply to schemes providing DB benefits only (or to DB benefits in hybrid schemes).
The Code is based on TPR’s six DC principles:
- essential characteristics;
- establishing governance;
- ongoing governance and monitoring;
- administration; and
- communication to members.
These principles are underpinned by 31 DC quality features that describe the activities, behaviours and control processes that are likely to deliver good member outcomes.
The Code consists of five sections focusing on the core areas of scheme governance: know your scheme, risk management, investment, governance and administration. Each section sets out the relevant DC quality features and legislation that trustees need to consider and suggests practical steps for trustees to follow to demonstrate compliance with the legal requirements. 23 DC quality features are included in the draft Code of Practice, many of which relate to investment. The remaining eight quality features will be included in the regulatory guidance, due to be published in draft form this autumn.
Here are a few of the key changes to the Code from its original draft:
- the investment section includes an emphasis on the default strategy, the longevity of investment strategies and stewardship;
- the Code explains which quality features may not be relevant to DC additional voluntary contributions in DB schemes; and
- the Code recognises that there may be viable alternative methods of meeting the legal requirements and that although there may be conflicts, several master trusts already tackle them.
TPR also published an Introduction to the draft DC code of practice no. 13, setting out a helpful checklist of the DC quality features and how the code and the impending regulatory guidance relate to TPR’s key principles and quality features that form the core of its DC regulatory approach.
The DC code has been laid before parliament and is expected to come into force in November 2013, at which time TPR is expected to publish finalised DC regulatory guidance and a DC compliance and enforcement policy.
How should trustees use the Code? TPR has suggested that ‘trustees should work through each section systematically’ and ‘work through the detail on a modular basis’. To assist schemes in understanding the legal requirements, the Regulator's online trustee toolkit training materials will be updated when the DC code comes into effect.