PENSIONS PROGRESS Great expectations

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PENSIONS PROGRESS Great expectations

The Pension Regulator clarifies the role of DC trustees

In a nutshell

the Pensions Regulator reminds trustees of DC schemes of the critical role they have in ensuring good member outcomes
emphasises the need for improvement in DC scheme governance
will set out further expectations concerning DC over the coming months.

The Pensions Regulator’s latest statement for trustees sets out some of the key differences between defined contribution (DC) and defined benefit (DB) schemes and clarifies the role of DC scheme trustees. In its statement, the Regulator reminds trustees of their duties under trust law and of the need to have appropriate knowledge and understanding, specifically relating to DC schemes (see Box).

The statement follows on from the discussion paper earlier this year in which the Regulator sets out its commitment to develop a DC framework that will help schemes to deliver good member outcomes.

What trustees have to do

Trustees should be able to demonstrate good behaviours and practices in the areas outlined in the statement, in particular:

Trustee knowledge and understanding – trustees must formally assess the capabilities of the trustee board and ensure that they have sufficient skills to manage the scheme effectively.
Conflicts of interest – trustees must ensure that they act impartially and that actual or perceived conflicts are suitably managed and disclosed in line with their conflicts of interest policy.
Costs and charges – charging structures must be applied fairly to all categories of membership and should not offer preferential rates to active members. Charges should be transparent and trustees must ensure that the overall charging structures offer members value for money.
Investment – trustees must formally and regularly review the range and appropriateness of investment funds available and ensure that the default fund complies with the guidance issued by the Department for Work and Pensions.
Asset protection – investments must be made prudently and should predominantly be with entities that are registered with the regulatory authorities. Any unregulated investment options must be clearly communicated to members and trustees must be able to demonstrate why such investments have been made. Trustees must establish what compensation arrangements are available in the event that an investment provider defaults and must understand the levels of protection available to members under the Financial Services Compensation Scheme.
Administration – trustees should meet at least quarterly to discuss governance issues and must understand how to manage their scheme efficiently and effectively. The key risks must be assessed and documented in a risk register. Trustees must continually assess the quality of administration and record keeping and seek assurances that outsourced services are operating effectively (eg an independent AAF01/06 report).
Contributions – members should be made aware of the impact that contribution patterns will have on the overall size of their pension fund. Contributions must be accurate and paid to the scheme in a timely manner, with any late payments being pursued.

Standards of governance

Against a background of increasing DC provision and the introduction of auto-enrolment in 2012, the pensions industry is likely to see a large increase in the number of people saving in DC schemes. However, the Regulator’s latest scheme governance survey has highlighted that trustees of DC schemes continue to be less engaged with their schemes than their DB counterparts, resulting in lower standards of governance.

Critical role

The statement attempts to clarify the fundamental differences between DB and DC schemes resulting from the nature of the retirement provision and the appendix outlines some of the key differences. The Regulator reminds trustees of the need to manage DC schemes differently, particularly with regards to managing underlying risks. It emphasises that trustees play a critical role in ensuring the effective governance of such schemes.

The Regulator is clear that it expects improvements in the governance of DC schemes. Persistent non-compliance that results in poor member outcomes will result in the removal of the trustees and/or the appointment of an independent trustee with exclusive powers.

What next?

Further statements and tools are expected over the coming months which the Regulator hopes will help set out its expectations for DC schemes.

As the Regulator believes that hybrid schemes are often given insufficient time and attention by scheme trustees, it has published a separate statement specifically addressing the complexities and risks associated with schemes offering mixed benefits.