On 10 January 2013 the Pensions Regulator (tPR) published a consultation paper on the approach to regulating occupational defined contribution (DC) pension schemes. It lays down the new standards for DC pension schemes to increase the chances of scheme members receiving healthy returns from their retirement savings.
The gradual phasing in of automatic enrolment means that, over time, between 5 and 8 million people are expected to be saving more or saving for the first time towards their retirement, the vast majority of which will do so via a DC scheme. Employees will now join a pension scheme without choosing to do so. TPR is aware assumptions cannot be made that savers will be engaged investors or that they will take control of their savings once they have been automatically enrolled. This places greater importance on good governance of DC arrangements. The principle of auto enrolment will only work if people are automatically enrolled into good quality schemes that are effectively governed, sustainable and offer value for money. TPR’s view is that to achieve this they must ensure that “schemes are governed in members’ best interest; that capable and unconflicted persons oversee the key decisions and functions that determine outcomes for members. It means that we have had to reassess the way in which we regulate DC provision.”
TPR has started by outlining their six fundamental principles of good DC scheme governance:
- Schemes are designed to be durable, fair and deliver good outcomes for members.
- A comprehensive scheme governance framework is established at set-up, with clear accountabilities and responsibilities agreed and made transparent.
- Those who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them out.
- Schemes benefit from effective governance and monitoring through their full lifecycle.
- Schemes are well administered with timely, accurate and comprehensive processes and records.
- Communication to members is designed and delivered to members to encourage member engagement so that they are able to make informed decisions about their retirement savings.
To this end, the recent consultation includes a set of 31 DC scheme quality features which deals with the main areas such as contributions, investments, governance standards, administration, value for money, converting a pension pot into a retirement income and member communications.
Key Elements of the Consultation
- A ‘comply or explain’ regime – occupational DC trust-based schemes will have to adopt a disclosure framework which demonstrates how they are ensuring their scheme complies with the DC quality features. If for whatever reason they cannot do this, they must be able to explain any inconsistencies to tPR. The thinking behind this element of tPR’s consultation is that it will help give employers confidence that schemes they choose for their workers meet certain standards and will require trustees to consider what processes are in place to ensure compliance with the key features.
- ‘Master trusts’ will be expected to obtain independent assurance which can help demonstrate that they comply with the DC quality features. Master trusts provide a useful and successful way of offering benefits such as low charges and good governance. However, due to the expected large uptake of auto enrolment into this type of DC space, tPR believes that an additional level of assurance is necessary to address the risks of low barriers of entry to the market and the potential for conflicts to arise between trustees and providers.
- A code of practice for occupational DC trust-based pension schemes is proposed that will provide useful and practical guidance on the requirements of pensions legislation and sets out standards of conduct expected of those running schemes. TPR will use these standards as a benchmark against which enforcement action can be taken if necessary as a result of non compliance.
- Enforcement action can be taken by tPR in instances where trustees fall short of the expected standards. This includes issuing notices directing compliance, fines and forcibly removing trustees and replacing them with new, more suitable ones.