DC governance: new guidance from the Pensions Regulator

This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.

Summary and implications

The Pensions Regulator has published six draft guides on DC governance. These will sit beside the new DC Code of Practice, the final draft of which was laid before Parliament this week and is due to come into force later this summer. I summarise what is covered by each one and highlight any points of particular interest.

The trustee board

This guide includes guidance on how to assess the fitness and propriety of trustees, the role of the chair, trustee board composition and the conduct and content of board meetings.

It includes a non-exhaustive list of the topics which the Regulator considers that trustees should cover at every board meeting. These include:

• conflicts of interest;
• member engagement and communications;
• investment performance and strategy;
• risks to the scheme – both new and existing;
• value for members; and
• administration.

Scheme management skills

This guide covers trustee skills and training, how trustees should work with and monitor advisers (including a checklist for reviewing contracts), working with employers, conflicts of interest and risk management. It includes a sample risk register and 'heat map' – to help with evaluating and prioritising risks.

It is not yet clear how much of the existing more lengthy guidance (particularly on conflicts and risk management) will be withdrawn by the Regulator when this new guidance is formally adopted.

Administration

This guide covers a wide range of issues including a section on working with the administrator and employer, receiving reports from the administrator, disaster recovery, core financial transactions, service level agreements, transfers and data accuracy.

One area on which we expect the Regulator to focus particularly is core financial transactions (this includes investment of contributions and transfers), and in particular the speed with which they are processed. The draft guide states that 'financial transactions should be processed without delay once all the necessary tasks have been completed'. Cited examples of unreasonable delay include a three day delay because the administrator is on holiday and a trustee taking 'several days' to authorise a BACs payment. It will be a challenge for trustees (through their administrators) to balance the new emphasis on speed with the importance of accuracy and protecting members from pension scams.

Investment governance

This guide covers delegation, stewardship, designing investment arrangements, performance monitoring and review, changing investment funds and security of assets.

A key section is the one on designing investment arrangements. This includes suggestions on gathering information so that trustees can understand the needs of the membership. One point to note is that the guide suggests that trustees should seek to carry out a full analysis of the demographics of the scheme membership at least every three years (or without delay after any significant change).

One area which has caused some problems for trustees is in deciding whether a fund may have become 'default fund' (and so subject to the charge cap) following a 'mapping' exercise. This is where the trustees have transferred the assets from a fund which a member originally selected into into an equivalent new fund (perhaps because they were changing provider or the new fund offered better value but with a similar asset profile). Arguably, under the legislation, this means the fund would now be a 'default fund'.

The draft guide is not as clear as we had hoped on this issue. It suggests the trustees should refer to information supplied to the member at the point when they originally chose to invest, and any subsequent relevant information, to establish whether the member had signed up to a particular investment approach or to a particular fund. The implication of the guidance seems to be that if the original documentation refers to subsequent switching without consent, then any switch will have been 'pre-selected' by the member and the new fund will not be a default fund. Hopefully the mapping issue will be further clarified following consultation.

Value for members

This is another key area for trustees. The draft gives useful guidance on how trustees should go about assessing value for members. The assessment requirement applies to those services that members pay for (or share the cost of with the employer). The guide also has sections looking at the charge cap and the new bans on active member discounts and member-borne commission.

Communicating and reporting

This final guide covers 'knowing your members', general communications, retirement communications (including new wording for retirement risk warnings) and reporting (including the content of the chair’s statement).

These draft guides are, on the whole, to be welcomed. They will give trustees a framework to use when getting to grips with the rapidly developing world of DC governance.