Once finalised, they will be essential reading for trustees of occupational pension schemes providing DC benefits. Following the guides should help to protect scheme members and trustees alike. In the meantime, trustees should have a look at the drafts to see what is in store when the guides come into force in July 2016.
The guides provide practical, non-prescriptive guidance on how to implement trustees' duties as set out in the new DC Code that the Regulator published in draft in November 2015. There are six new guides, each dealing with a basic governance topic: the trustee board, scheme management skills, administration, investment governance, value for members, and communicating and reporting.
The scope of the guides and relevance for DB schemes with DC AVCs
The 'how to' guides apply to all occupational pension schemes with some DC savings accounts, ie not just pure DC schemes, but also hybrid schemes, including DB schemes that have some DC AVCs.
The Regulator recognises that trustees' actions will depend on the nature of the particular scheme and its membership. In particular, the Regulator states: "If a scheme's only money purchase benefits are AVCs, the risk to members should be considered in the context of the value of AVCs relative to members' overall benefits in the scheme, and a proportionate approach applied". However, there are no examples so far in the draft guides showing what this proportionate approach might look like in practice. There is likely to be much debate around this still, which should force the Regulator to provide some examples.
What trustees have to do
The new guides together contain more than 120 pages. Much of the guidance on the key issues (eg design of the default fund, member communications and reviews of third party suppliers) is unlikely to contain any surprises for most DC trustees. Here are a few examples of recommendations that may not have specifically featured before:
- The trustee board could promote the benefits for employers of allowing trustees to take time off work for training and contributing towards the cost of running the scheme.
- Trustees should be vigilant to the risk of pension scams and risks relating to cyber security threats.
- Trustees should explore the use of a platform that facilitates standardised information and the electronic processing of transfers (eg Origo Options or Altus transfer gateway).
- Trustee boards should be diverse in relation to type of trustee, experience and skills, and societal demographics (age, race, sex, age, disability and orientation).
- Schemes could consider appointing a scheme secretary, perhaps through an independent external firm. Where it is not practical or proportionate to include a professional trustee on the board, schemes could consider appointing or consulting with one on a temporary basis.
- Schemes should assess the performance of advisers and service providers against documented targets on a regular basis – at least quarterly where possible.
- As an example of proportionality, the administration guide cites a decision only to trace lost members with funds in excess of £25,000 on an annual basis, or only to trace every three years where the pot size is less than £5,000.
- Trustees may wish to consider setting automatic review triggers based on the level of net performance of investment funds against their benchmarks or objectives.
- Trustees should think about the tone and language of any member communications in light of the demographics and other characteristics of scheme membership.
- Where a court has issued an attachment order following a member's divorce, trustees should consider informing the member's ex-spouse if the member applies to take their benefits.
- Although the Regulator acknowledges that trustees may be unable to establish definitively the level of protection that different scheme assets would have in the event of fraud, malfeasance or other adverse events, trustees should still attempt to assess the risk and consider ways of reducing it, if necessary.
What happens next?
The Regulator intends to supplement the guides with checklists and summaries, and it will also update its scheme assessment template, in due course. The draft scheme management skills guide already includes a detailed checklist for reviewing contracts (emphasising the importance of negotiating, among other things, good service level agreements). And the communicating and reporting guide already contains an example of a good practice process for providing information at retirement.
The consultation closes on 11 May 2016. The finalised Code and guides are expected to be published in July 2016.
Our comments
There is much in the new guides that is practical and helpful. The guides will give trustees lots of ideas about how to go about complying with their basic duties.
Where the guides fall down is in explaining how those duties apply in the context of a particular scheme, such as a DB scheme with DC AVCs, or a large DB scheme with only a small, closed DC section. The Regulator hides behind the word "proportionality" and does not properly explain what it expects in practice. We hope that, as a result of the consultation, additional examples are provided.
View as a PDF (2-pages, 247KB)