With effect from 1 June 1988, the Thatcher Government introduced personal pension plans. These were and remain individual pension plans in which the member holds legal title to the policy. They are not company pension schemes.
They were capable and indeed primarily used in the early years for ‘contracting out’ of the state earnings related pension scheme. That is to say a member sacrifices his or her accrual of pension rights in return for a rebate of national insurance contributions which were automatically redirected to his or her personal pension plan.
However, things moved ahead apace and with the advent of the Pensions Act 1995 employer and trustees’ responsibilities became far more onerous to the point that in the years since, the majority of employers have moved away from occupational pension schemes to an adulterated version of the previously mentioned personal plans in the form of group personal pension plans (GPPP).
These were and still are sold on the grounds of being contemporary planning with flexibility and portability, and to a large extent this is true.
However, many employers have used the advent of GPPP’s to replace their occupational pension schemes and to a lesser or greater degree, abdicate responsibility for governance of those plans. There sits no trustee boards to preside over the administration and appropriateness of a GPPP as these are merely a collection of individual policies.
It is for this reason that the Pensions Regulator has issued defined contributions (DC) governance guidelines. It recommends that employers offering GPPPs to its employees actively govern the pension arrangements to ensure the smooth running of the scheme and to monitor its competitiveness and performance. The recommended format for this governance is the installation of a steering committee known as the ‘governance committee’.
A ‘statement of principles’ should be drafted to outline the structure and objectives of the committee.
A chronological timetable of events that should occur throughout the scheme year should be drafted to guide the committee through the proposed governance structure.
The committee should meet at least twice a year and the governance report should include a risk register which should form the key elements of the standing agenda for the meetings, namely:
poor administration practices
poor investment returns
unduly high charges
poor member decisions on retirement.
The result is that the sophisticated investor has all the control they wish, whereas the unsophisticated investor broadly has no idea of what is going on, in their pension plan.
As the value of a member’s fund at retirement is key to his or her ultimate benefit the greatest focus of the committee is placed on the annual investment review including:
appropriate investment advice in relation to the default fund
member behaviour, ie the top eight funds the members have selected
relevance of benchmarks in line with market practice and trends
investment performance and manager development.
There are many other popular areas for discussion which may not necessarily be reviewed at every meeting but may be retained as a standing item on the agenda such as:
income tax relief on personal contributions
current economic climate
transfer of previous pension benefits
retirement planning advice
Finally, it is recommended that an ‘annual member satisfaction survey’ be conducted and applied to selected employees at the discretion of the committee. The purpose of the survey would be to gather feedback directly from pension plan members anonymously, as an opportunity for them to express opinion/concerns regarding the pension plan.
I am sure you will agree that the guidelines appear onerous and the big problem with guidelines is that if they are not followed they become enshrined in legislation.
While we have the national employment savings trust (NEST) and auto-enrolment as a distraction for the next two or three years, once implementation is complete I can only foresee the Pensions Regulator imposing the DC guidelines on all employers, and to avoid the imposition by reference to legislation I suggest employers get ahead of the game and establish a governance committee now!
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.