Defined Contribution Scheme Governance
A number of significant changes to the legal and regulatory requirements for defined contribution workplace pension schemes came into force on 6 April…
A number of significant changes to the legal and regulatory requirements for defined contribution workplace pension schemes came into force on 6 April 2015. These included changes relating to the new pension flexibilities for members and related safeguards; new requirements to ensure that pension schemes deliver value for money and that investment strategies are designed for members’ interests; restrictions on member borne costs and charges; and the introduction of more stringent governance requirements.
To reflect the changes, the Pension Regulator is introducing a new code of practice: ‘Governance and administration of occupational defined contribution trust based schemes’.
Consultation on the Pensions Regulator’s new draft code of practice closed on 29 January 2016, and the code is expected to come into force in summer 2016.
The code will apply to trustee boards of all occupational pension schemes with two or more members (whether active, deferred or pensioner) which offer money purchase benefits. The purpose of the code is to set out the standards of conduct and practice that the Pension Regulator expects trustee boards to meet in complying with their duties in legislation.
The code covers a range of different areas including:
- Governance requirements relating to the appointment of trustee boards, the chair of trustees, member nominated trustees, and also specific rules relating to trustee boards of relevant multi employer schemes.
- Scheme management skills including managing risk; trustee knowledge and understanding; appointing and managing relations with advisers and service providers; working effectively with the employer; and managing conflicts of interest.
- The code states that “good administration is the bedrock of a well run DC scheme”, and trustee boards are expected to consider administration as a substantive item at every regular meeting; feature administration on the scheme’s risk register; have a clear understanding of the scope of required administrator responsibilities; and adopt procedures to ensure that scheme administration is carried out appropriately.
- Ensuring that trustee boards have an understanding of the investment powers and duties they have under the scheme trust deed and rules and legislation and ensure that decisions are taken by those with the skills, knowledge and resources necessary to do so effectively. Trustees are also expected to set and review investment objectives and strategies and regularly review documents and governance structures relating to how investment risks are assessed and investment decisions are made.
- Ensuring value for members and annually assess and report on the extent to which member costs and charges represent good value for members.
- Finally the code sets out a range of communication and reporting requirements. The code provides guidance on how and when trustees should communicate with members, and also guidance on the existing requirement to include a ‘chair’s statement’ in a scheme’s annual report and accounts, detailing compliance with the new governance requirements. The regulator expects the statement to provide a ‘meaningful narrative’ of how and the extent to which the new governance standards have been met. A scheme’s first chair’s statement must be produced as part of the annual report and accounts for plan years ending on or after 6 July 2015 (from 6 April 2015 to the end of the plan year).
Trustees who have not already done so should act now to review the provisions of the draft code and identify areas where action may be needed to ensure the required new governance standards are met.
Dei Harries is an Associate in the Employment, Pensions and Immigration Team.
If you would like to discuss the issues raised in this article, please contact Dei (firstname.lastname@example.org) or speak to your usual Weightmans adviser.