As a result of the increased existence of defined contribution schemes The Pensions Regulator has been keen to communicate with DC trustees exactly what good governance should look like.

The shift from defined benefit (DB) schemes to defined contribution (DC) schemes may have occurred without the recession, but it certainly seems to have accelerated it. Other factors causing this shift include increased longevity, the impositions of tighter funding and governance requirements, the pressure of scheme deficits on company balance sheets and auto-enrolment.

The background

In 2012, The Pensions Regulator conducted its annual Governance Survey. The results showed that 67% of DB trustees are engaged with their scheme in comparison with 34% of DC trustees-figures that TPR is no longer prepared to accept.

In response, TPR's Code of Practice (the DC code) came into effect on 21 November 2013. The DC code applies not only to trust based occupational DC pension schemes, but also to hybrid schemes and additional voluntary contribution (AVC) arrangements in DB schemes.

The structure of the code

The code is based around the six DC principles, which are as follows.

  • Schemes are designed to be durable, fair, and deliver good outcomes for members.
  • A comprehensive scheme governance framework is established at set up, with clear accountabilities and responsibilities agreed and made transparent.
  • Those who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them out.
  • Schemes benefit from effective governance and monitoring throughout their full lifecycle.
  • Schemes are well administered with timely, accurate and comprehensive processes and records.
  • Communication to members is designed and delivered to ensure members are able to make informed decisions about their retirement savings.

These six principles are underpinned by 31 quality features, which provide more detail about the activities, behaviours and control to deliver good member outcomes.

The DC code does this by setting out five core areas along with a summary of TPR's suggestions as to how scheme trustees can meet the DC quality features.

1. Know your scheme

Trustees will:

  • understand their duties and be fit and proper to carry them out; and
  • ensure that sufficient time and resources are identified and made available for maintaining the ongoing governance of the scheme.

2. Risk management

Trustees will:

  • establish and maintain adequate internal controls which mitigate significant operational, financial, regulatory and compliance risks; and
  • ensure that sufficient time and resources are identified and made available for maintaining the ongoing governance of the scheme.

3. Investment

Trustees will:

  • ensure that investment objectives for each investment option are identified and documented in order for them to be regularly monitored;
  • ensure that the number and risk profile of investment options offered reflects the needs of the membership;
  • ensure that a default strategy is provided which is suitable for the needs of the membership; and
  • act in the best interests of all beneficiaries.

4. Governance of conflicts of interest and advisers/service providers

Trustees will:

  • be able to demonstrate effectively how they manage conflicts of interest; and
  • understand and put arrangements in place to mitigate the impact to members of business and/or commercial risks.
  • Administration

5. Administration

Trustees will:

  • ensure that member data across all membership categories is complete and accurate and is subject to regular data evaluation; and
  • support employers in understanding their responsibilities for providing accurate information, on a timely basis, to scheme advisers and service providers.

Compliance with the DC code

While the DC code is a voluntary code, TPR expects trustees to be able to demonstrate their compliance with it. Where trustees cannot demonstrate compliance, they must be able to demonstrate how their approach is in the best interests of their members.

Trustees are expected to publish an annual governance statement assessing their scheme's compliance with the DC code. To assist trustees, it has released a template that they can use to communicate to scheme members, the employer and TPR that their scheme meets the DC quality features. The template is available from TPR's website.

Employers that have contract based arrangements are also encouraged to be compliant with the DC code. While such arrangements are not within the remit of TPR, it is working closely with the Financial Conduct Authority to ensure consistency of standards.

We have taken great care to ensure the accuracy of this newsletter. However, the newsletter is written in general terms and you are strongly recommended to seek specific advice before taking any action based on the information it contains. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. © Smith & Williamson Holdings Limited 2014. code: 14/989 expiry: 28/02/15