Setting high standards: The new Defined Contribution Code of Practice
The Pensions Regulator’s new Defined Contribution Code of Practice came into effect on 28 July 2016, along with six guidance notes.
The Pensions Regulator's new Defined Contribution Code of Practice came into effect on 28 July 2016, along with six guidance notes.
The new code of practice replaces the 2013 version. Significant developments since 2013 (including the new options available to members to access their benefits from age 55) have driven the need for the replacement.
The old code identified 31 quality features of Defined Contribution Schemes. The new code adopts a different approach in a shorter and simpler document. It differentiates clearly between explaining what the law requires and what the Regulator expects.
Like all of the Pensions Regulator's codes of practice, this one is not a definitive statement of the law and there is no direct penalty for failure to comply with it. The code is not prescriptive and the Regulator recognises that different schemes may benefit from differing approaches. However, the code of practice will be taken into account by the Pensions Regulator and the courts in determining whether legal requirements have been met.
The code applies to all occupational pension schemes offering money purchase benefits, including defined benefit (e.g. final salary) schemes offering money purchase additional voluntary contributions or underpins. The code does not apply to schemes offering only defined benefits. Nor does it apply to contract-based schemes, including personal pensions.
The code is divided into six main sections, each addressing a different aspect of Defined Contribution governance. In this article we do not attempt to summarise all the content of the code or the related guidance but in the sections below we identify some key trustee behaviours that the Regulator considers will demonstrate compliance with the law.
The Trustee board
- Assessing the suitability of individuals to act as trustees, before their appointment and periodically during their term of office;
- Implementing an effective written process for the appointment of the chair of trustees;
- Ensuring trustee boards have the right mix of skills and knowledge to run the scheme effectively.
Scheme management skills
- Ensuring all trustees have a working knowledge of the scheme’s rules, policies and practices;
- Maintaining controls to ensure that the scheme is operated in accordance with the rules and relevant law and that risks are identified and managed;
- Implementing a process to appoint and monitor the performance of service providers.
- Having a service level agreement in place with the scheme administrator and including consideration of scheme administration on the agenda for every trustee meeting;
- Ensuring “core financial transactions” (including the investment of contributions and making transfer payments) are processed promptly and accurately, treating legislative timescales as long stops;
- Implementing and regularly reviewing a business continuity plan.
- Clearly documenting investment governance arrangements including objectives, responsibilities and reporting lines;
- Complying with requirements in respect of default investment arrangements, including maintaining a statement of investment principles;
- Reviewing the performance of each investment option on a regular basis.
Value for members
- Reviewing, at least annually, charges and costs borne by members and assessing whether they represent value for money.
Communicating and reporting
- Ensuring member communications are clear, accurate and distributed in an appropriate way;
- Ensuring member communications about retirement options provide members with the information they need to make informed decisions.
Implementing and maintaining these arrangements (and the others detailed in the code of practice and guidance) should not only help to ensure that trustees comply with the law and best practice. It should also help to optimise member experience and retirement outcomes.
We recommend that all schemes affected by the new regime carry out a compliance audit and implement an action plan to address any shortcomings.
The Pensions Regulator’s latest annual survey of Defined Contribution scheme governance provides an insight into the challenges faced by schemes to meet the new standards. Predictably, the level of awareness of the new governance standards amongst trustees of smaller schemes is lower than amongst trustees of larger schemes. Compliance standards correlate in much the same way. The standard expected to cause trustees the greatest difficulty is the requirement to assess value for members. In view of these results, we are expecting the Regulator to work hard in providing continuing support to trustees but also to take a close interest in actual compliance standards.
Members of the Weightmans pensions team can provide advice and support on all aspects of this important area of scheme governance.
For more details please contact Mark Poulston, Partner, Head of Pensions (firstname.lastname@example.org).