Pensions Regulator begins DC default fund trustee compliance drive

Pension schemes which provide money purchase benefits are required to review their default investment strategy and the performance of their default arrangement once every three years, or when there is a significant change in the scheme's investment policy of the demographic of its membership. Trustees must check that the default arrangement is performing as expected, and that the strategy ensures investments are made in savers' best interests.

Pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law, said that the announcement showed that the regulator was once again "turning its attention to employer-run schemes, having been pre-occupied for some time now with DC master trusts".

"Default investment arrangements play a key role in the delivery of member outcomes in DC schemes - and have attracted a greater governance burden than self-select arrangements," he said. "Many schemes have changed aspects of their default investment arrangements in response to the 'freedom and choice' reforms, and work should now be underway to think about any changes to accommodate the new statutory requirements in relation to environmental, social and governance (ESG) factors."

"Governance process and procedure around default strategy reviews, and ESG, need to be reported in chair's statements and statements of investment principles (SIPs) - and made open to public scrutiny. Employer-run schemes should make every effort now to ensure their chair's statements cover all the reporting requirements and include the meaningful narrative the regulator is after," he said.

The Pensions Regulator contacted over 500 DC schemes with between two and 999 members, as part of what it called a 'pilot' exercise. The trustees were asked to review TPR guidance setting out its compliance expectations, and then complete an online declaration stating that they had recently reviewed the strategy and performance of their scheme's default arrangement and that they remained suitable.

If the scheme's default strategy had not been recently reviewed, the trustees were then taken through a checklist to ensure compliance with the law. These included reviewing the current strategy taking members' needs into account, as well as the performance of the default arrangements. Trustees struggling to meet the expected standards were asked to consider whether savers should be transferred into an alternative and better-run scheme in order to ensure value for money.

As many as 99% of savers in DC schemes with 12 or more members could be invested in their scheme's default strategy, according to research by TPR. David Fairs, executive director of regulatory policy, said that the regulator was "working to wake up those trustees who, research has shown us, do not engage with the regulator or sometimes do not realise they are not meeting standards of governance or administration that we expect".

"Regularly reviewing a pension scheme's default arrangement, which the majority of savers contribute into, is vital for trustees to ensure they are investing in the best interests of members," he said.

New rules which come into force on 1 October 2019 will require trustees to disclose how they take account of "financially material considerations", including ESG factors, as part of their published statement of investment principles (SIP). From the same date, trustees of DC schemes with 100 members or more will be required to include in their SIP policies in relation to the stewardship of investments made by the scheme's default fund, such as how they engage with the firms that they invest in and how voting rights are exercised. An additional 'implementation report' will also be required by 1 October 2020.

Pensions expert Tom Barton said that TPR had been quick to issue penalty notices in relation to chair's statements, and the same could be true of SIPs.

"While a wave of those penalty notices were revoked, this was generally on procedural grounds and not because the regulator accepted a 'lower bar'," he said.

"Getting ESG ready for October is not just a question of including some compliance wording in SIPs – because it's part of a statutory journey of showing, publicly, how you're delivering on ESG policies. Failures in reporting are likely to attract fines and scrutiny of underlying governance processes," he said.

Barton added that it was also important for trustees to properly understand the extent of the default investment arrangements in the DC schemes of which they have oversight.

"This isn't always obvious," he said. "Default investment arrangements can crop up through membership numbers, and after any trustee-led changes to the self-select investment options."