This is the first of a series of Clyde & Co Pensions Team briefings on various aspects of Defined Contribution (DC) pensions. This briefing covers the new DC code of practice.


The Pensions Regulator has brought into force on 28 July 2016 its revised code of practice on the governance and administration of occupational trust based pension schemes providing money purchase benefits.

The Regulator published a previous code on DC pension schemes in 2013 but had to update this to take account of the pensions freedom reforms in 2015 and in November 2015 consulted on revising the whole code and existing guidance. This is the final version of the new code after consultation with the industry. Its title refers more accurately to schemes providing money purchase benefits rather than just to DC schemes on their own.

Pensions Regulator executive director for regulatory policy, Andrew Warwick-Thompson, said the new code is shorter, simpler and easier to navigate than its predecessor: "The new DC code clearly sets out our expectations of trustees and what is required of them to comply with legislation, including the most recent changes in the law." Its main aim is to continue to raise standards of governance and administration in DC schemes.

As with the previous code, compliance with the new code is voluntary and it is not law but it can be taken into account where relevant in a court case or Pensions Ombudsman case. However, the Regulator expects Trustees to familiarise themselves with it and then consider whether their schemes are compliant with it. In many instances, the code is not prescriptive about particular methods that Trustees should use to meet the standards required.

Overview of the Code

The 2016 code is deliberately much shorter than the 2013 version and is divided into six sections:

  • The Trustee Board and in particular appointing a chairman and member-nominated trustees;
  • Scheme Management skills such as managing risk, trustee knowledge and understanding, appointing and managing professional advisers and service providers and conflicts of interest;
  • Administration issues such as core financial transactions and record keeping;
  • Investment Governance including setting, monitoring and reviewing investment strategies, security and liquidity of assets and default funds;
  • Value for members and restrictions on costs and charges;
  • Communicating and reporting including at retirement communications, pensions scams, the chairman's annual governance statement and reporting to the Regulator.

The 2013 code had 31 quality features for a well-run DC Scheme – these have now been removed in the new code. Also the Regulator has dropped its expectation that schemes should produce a voluntary governance statement.

The Regulator's guidance has also been revised and so the new code is supported by 6 "how to" guides, one for each of the main areas covered by the code providing best practice guidance. They set out recommended best practice and practical ways in which trustees can demonstrate their compliance with legal obligations.

To whom does the Code apply?

The new code applies to Trustees and Trustee Boards of all occupational pension schemes with 2 or more members which offer money purchase benefits. This means that as well as applying to DC schemes and DC sections of hybrid schemes, it also applies to money purchase AVCs within occupational defined benefit (DB) schemes, money purchase benefits with a DB underpin and money purchase underpin benefits in so far as the relevant legislation applies to them. Thus the code only applies to AVCs to the extent to which specific legal obligations apply to AVCs and where specific legal obligations do apply, Trustees are encouraged to apply a proportionate approach.

Personal pension schemes, stakeholder schemes and other contract based arrangements are outside the scope of the DC Code. They are regulated by the FCA.

Some detailed provisions of the new code

Trustee Board

The Trustee Board is the body accountable for running the scheme. Trustees are required to act in accordance with their fiduciary duties to the beneficiaries of the scheme as well as legal requirements. The Regulator expects the recruitment process for any trustee to include consideration of the fitness and propriety of the candidates and to regularly review their fitness and propriety.

The role of the chair of Trustees is an important one. The Regulator expects Trustees to have a "robust and documented process" in place for appointing a chair. This process should "consider the leadership qualities of candidates and their ability to drive good practice within the scheme".

Scheme Management

As well as the requirements of knowledge and understanding on individual trustees, the Regulator expects the Trustee Board as a whole to possess or have access to and maintain, the knowledge and understanding necessary to properly run the scheme and ensure sufficient standards of governance and administration.

Where Trustees appoint advisers and service providers, as required by law or otherwise, the trustees retain ultimate accountability. It is therefore vital that Trustees understand the scope of the roles and responsibilities being delegated to third parties and the role of advisers in relation to the scheme. The Regulator says that "the ability to effectively manage commercial relationships is a key skill that we expect trustee boards to be able to demonstrate".


The Regulator expects trustee boards to consider administration as a substantive item at every regular meeting. They expect trustee boards to regularly receive appropriate information or stewardship reports from the administrators.

The law requires trustees to ensure that core financial transactions are processed promptly and accurately. All transactions which relate to the handling of member and employer contributions and assets relating to those contributions, once they have been received by the scheme should be treated as "core financial transactions". The Regulator thinks "promptly" can vary according to the circumstances. Trustees may not always have the power to amend or change the frequency of all processes that affect the time it takes to process a core financial transaction.

Investment Governance

Appropriate investment governance in DC schemes including during the "accumulation" and leading up to and during the "decumulation" phases is one of the most influential factors in the delivery of good members outcomes. Trustee boards are responsible for investment governance and the law requires them to have a good working knowledge of investment matters relating to the scheme, to understand the powers and duties they have under the trust deed and legislation and to ensure that decisions are taken by those with the skills, knowledge and resources necessary to do so effectively.

The Regulator expects trustee boards to regularly assess the performance of each investment option including the default option and to consider evaluating performance by referring to industry benchmarks for investment funds with similar risk/reward profiles. They should review their investment strategies to consider the changing long-term investment market conditions, investment products and techniques available in the marketplace.

Value for members

The code emphasises the importance of demonstrating good value is being provided to members of the scheme. This concept may be familiar to some from independent governance committee reports for personal pension schemes (which are not subject to the code as they are not occupational pension schemes) and their debate around value for money.

Trustees will have to calculate "the charges and, insofar as they are able to, transaction costs…to which members' funds are subject and to assess the extent to which they represent good value for members" on at least an annual basis. An assessment of the value must then be given in the chairman's statement. Value for members does not necessarily equate to "low cost".

The law provides certain restrictions on the amount that members can be charged in default arrangements used by employers to meet their duties under auto-enrolment legislation. When calculating whether their default arrangements are compliant with such controls, trustee boards should document their calculation process and in all but the most straightforward cases, to seek professional advice.

Communicating and reporting

Good member communications, provided at the right time and in an accessible format are vital if members are to engage and make decisions that leave to good outcomes in retirement. The law sets out some circumstances when trustee boards must communicate with their members. The Regulator expects trustee boards to ensure that all communications are accurate, clear, relevant and provided in plain English. It expects communications to members about their retirement options to clearly set out the steps a member should consider taking to allow them to make an informed decision.

When members wish to transfer out of the scheme, the Regulator expects trustee boards to carry out due diligence on the receiving scheme to check whether it can legally be paid a transfer value. This includes checking whether the scheme is registered with HMRC.

The Regulator expects the chairman's annual statement "to be written in such a way as to provide a meaningful narrative of how, and the extent to which, the governance standards have been complied with". Trustees should set out clearly the measures they have taken to achieve compliance and the details of how they reached their conclusions on the extent of that compliance. The steps they have taken should be contemporaneously documented.

Clyde & Co Comment

Trustees will welcome the shorter code and the simplification of things as typified by the removal of the 31 quality features from the previous code. They will, however, still be subject to some quite onerous requirements and will need to acquire, if they do not already have it, a general understanding of how all aspects of their schemes are run.

The perennial question of the extent to which defined benefit schemes will need to comply with the code in respect of their AVCs remains and although the Regulator has said that trustees can adopt a proportionate approach, further advice may still be necessary.

Please click here to download a copy of the Pensions Regulator's code of practice.