DC trustees urged to familiarise themselves with new governance tools from Pensions Regulator

Out-Law News | 07 Feb 2014 | 4:44 pm | 2 min. read

Defined contribution (DC) pension scheme trustees can now use a standardised governance statement to demonstrate their compliance with the Pensions Regulator's quality requirements.

The regulator has published a template that trustees can use to show how their scheme meets the features set out in the recently-published DC code of practice, and to explain how and why the scheme had adopted a different approach where one of these features is absent or partly in place. Trustees are expected to publish such a statement, which should be easily available to scheme members and sponsoring employers, on an annual basis as part of the code.

Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-law.com, said that encouraging scheme trustees to publish a statement picking up on governance failings would help the regulator to ensure DC schemes were fit for purpose.

"The governance statement is the Pensions Regulator's way of getting trustees to report on areas where their scheme may not be up to scratch," he said.

"Trustees should familiarise themselves as soon as possible with the regulator's guidance on DC governance and take any necessary action. Trustees could face being investigated by the regulator, or receiving complaints from members, if they can't give their scheme a clean bill of health. This could uncover systematic, albeit inadvertent, breaches of trust law duties in relation to DC - and give rise to a range of claims and complaints," he said.

The Pensions Regulator's DC code of practice and related guidance came into effect on 21 November 2013. The documents contain 31 'quality features' that trustees of DC schemes are encouraged to adopt in order to meet their legal requirements, covering areas including risk management, investments, ensuring the security and liquidity of pension scheme assets and monitoring and reviewing strategy. Although the code and guidance themselves are not statements of law, the 22 features set out in the DC code have a direct legislative underpinning. This means that schemes are likely to be in breach of the law if any of these features are missing.

The vast majority of the between five and eight million people that are estimated to begin saving more towards their retirement, or saving for the first time, under the Government's automatic enrolment programme will be enrolled onto DC schemes. Benefits provided on retirement to DC scheme members depend on the performance of the saver's investment, meaning that it is the scheme member rather than the employer who bears the full risk of the scheme losing value. The Pensions Regulator has indicated that it will adopt a proactive approach to regulation and enforcement, including through the use of regular thematic reviews of the market.

The Pensions Regulator expects trustees to assess their scheme against the DC code and regulatory guidance on an ongoing basis. The results of this assessment should then be used to inform the annual governance statement. Trustees are due to publish their first governance statement at the end of the 2014/15 scheme year, and to include this in at least one of their website or scheme annual report.

Trustees should use the governance statement to confirm that their scheme complies with the code of practice and guidance requirements, particularly in relation to the quality features. Where a feature is absent or only partly in place, trustees should explain why the scheme has adopted a different approach or set out what action they intend to take to correct or improve that feature. The statement should also be used to set the scheme's priorities for the coming year.

"We expect trustees to be able to show that their scheme meets the standards set out in our code and guidance - most trustees want to do right by their scheme members, and this tool will enable them to demonstrate that they are doing their job properly," said Andrew Warwick-Thompson, the Pensions Regulator's executive director for DC governance and administration.

"The templates will help trustees to keep on top of their systems and controls, to monitor risks and to prioritise actions for the year ahead – enabling schemes to identify and take action to remedy any issues and, ultimately, improve retirement outcomes for DC pension scheme members," he said.