Compliance with new defined contribution code not just a matter of good practice, says expert

Trustees that adhere to a new code of practice on defined contribution (DC) pension schemes can help themselves comply with their legal obligations, an expert has said.

The Pensions Regulator announced that the new DC code (58-page / 343KB PDF) came into effect on 21 November. The code sets out guidance on how pension trustees can meet their legal requirements but there is no penalty for non-compliance with the code itself.

The regulator has called on DC pension scheme trustees to assess whether their pension schemes are up to the standards set in the code and urged financial advisers to familiarise themselves with the code so as to understand what trustees have to consider when making decisions about pensions investments.

"DC governance is not merely good practice," pensions law specialist Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, said. "It is critical if trustees are to discharge long established trust law duties in relation to DC members and beneficiaries. A failure to take DC governance seriously does not just irritate the Pensions Regulator; it exposes trustee boards to the risk of breach of trust claims."

Barton also said trustees are under a legal duty to act in the best interests of members and that compliance with the new code can aid compliance with this duty. He also said that DC pension scheme trustees must ensure they act in line with member expectations.

"A failure to take DC governance seriously means that DC pots are likely to remain in deficit relative to member expectations, and trustees are unlikely to have discharged their legal duties in relation to DC members," Barton said. "By an extension of logic, good DC governance therefore reduces both the likelihood of claims and the risk of those claims being successful.  For DC governance, read 'risk management'."

Barton said that most of the claims and complaints raised about pension schemes in recent times relate to defined benefits (DB) pensions schemes, not DC schemes. However, he predicted the trend would change as more and more DB pension schemes close down and more individuals place "increasing reliance on DC as the sole or primary source of retirement income".

The new code contains a number of 'DC quality features' that outline best practices trustees are encouraged to adopt. They contain recommendations on various aspects of overseeing a pension scheme and touch on areas such as risk management, investments, ensuring the security and liquidity of pension scheme assets and monitoring and reviewing strategy.

Next year the regulator intends to publish a template ‘comply or explain’ governance statement that DC trustees can use to inform scheme members, the employer and the regulator whether they meet the DC quality features or how other approaches they adopt are in their members' interests.

"Unless trustees begin taking DC seriously as a matter of urgency, these governance statements could become an audit trail of failure – further fertile grounds for successful claims," Barton said.

"Trustees must take action now to guard against breach of trust claims. A successful claim might reveal systemic failings in the running of the schemes. This could give rise to the possibility of a class action by a group of members against the trustee board. In such circumstances it is far from clear that trustees would be protected by scheme exoneration and indemnity terms and any insurance policies. Trustees need to act now to manage their risks," he added.

The code applies to trustees of all occupational DC trust-based pension schemes with two or more members, including additional voluntary contributions (AVCs) under occupational defined benefit (DB) schemes and the DC element of hybrid schemes, which feature a mixture of DC and DB elements. It does not apply to schemes, or elements of hybrid schemes, which provide DB benefits only or to so-called 'contract-based' schemes, such as work-based personal pensions or stakeholder schemes.

"Our aim is to protect retirement savers and to ensure their money is invested in good quality schemes that are well-run in the members’ best interests," Andrew Warwick-Thompson, executive director for DC, governance and administration at the Pensions Regulator, said in a statement. "Schemes that fall short of these standards should expect some difficult questions, and they may incur enforcement action in order to rectify breaches in pensions law."