For this month’s governance article, we focus on the Pension Regulator’s new draft DC Code of Practice (“ new code”), which was under consultation between 24 November 2015 and 29 January 2016. The new code has been revised “to help trustee boards and managers of DC schemes to comply with the law” as well as bringing it up to date to comply with the changes to DC Schemes brought in earlier this year.
The new code is much shorter and simpler and would completely replace the previous code – here is a summary of the key points:
The Pensions Regulator (“
TPR”) expects trustee boards to have a “robust and documented” process for appointing a chair, who is responsible for signing the annual chair’s statement. Within this process, leadership qualities and ability to drive good practice within the scheme should be considered.
Chair’s annual statement:
TPR expects the statement “to be written in such a way as to provide a meaningful narrative of how, and the extent to which, the governance standards have been complied with”. Trustee boards should clearly set out the measures they have taken to achieve compliance and the details of how they reached their conclusions on the extent of compliance.
In the case of
relevant multi-employer schemes, if a trustee who was already in their post on 6 April 2015 is deemed to be non-affiliated, TPR does not expect them to go through a reappointment process to fit the “open and transparent recruitment” criteria contained in the 1996 Scheme Administration Regulations.
Relations with advisers and service providers:
TPR expects trustee boards to monitor (on a regular basis) the performance of their service providers as part of meeting the new duty to process core financial transactions promptly and accurately. If any providers are not performing satisfactorily, TPR notes the trustee board now has power to ignore any restrictions in its trust deed and rules governing the choice of adviser or service provider. In this situation, TPR expects the board to select, appoint and review advisers and service providers to the scheme taking in to account members’ best interests.
As far as the duty to process core financial transactions
promptly and accurately is concerned, TPR comment that the meaning of “promptly” may depend on the context. Trustees may not have the power to change the relevant processes, but where they do, TPR expects trustees to regularly review these processes and change them to ensure that core financial transactions are processed in as short a time as possible.
For these core financial transactions TPR expects trustees to use electronic payment methods, with cheques only used in “exceptional circumstances”.
Trustees must produce a Statement of Investment Principles (SIP) for the scheme (including default arrangements and all other investment options (unless they fall within an exemption)). The SIP must be disclosed to members on request.
The law does not require trustee boards to have separate SIPs for each individual arrangement within a scheme. TPR says it does not expect trustees to put these in place, although if trustees prefer to prepare separate SIPs then they may do so.
TPR expects trustee boards to regularly take steps to engage with members about the date they may want to take their benefits and any preferences they may have about how they want to take their DC benefits.
This and other information provided by members should be taken into consideration when members’ investment options are determined, and equally when the general investment strategy for the scheme is determined.
The new code says that trustee boards are obliged to explain their assessment of whether charges levied on members represent value for members in the annual chair’s statement. This explanation will need to address how the assessment has been carried out and the conclusions that have been reached, while the evidence used by trustee boards to come to their conclusions will need to be documented contemporaneously.
TPR acknowledges that different members have different interests, and so it expects trustee boards to “make efforts to understand the characteristics of their members and, where possible, their preferences and financial needs, and to take this into consideration when exercising their judgment about what represents value for members”.
Trustee boards should examine four key areas when evaluating value for members,
as a minimum. These areas are scheme management and governance, administration, investment governance and communications.
When calculating whether any default arrangements are compliant with charge controls, TPR expects trustee boards to document the calculation process and, in all but the most straightforward cases, to seek professional advice.
TPR expects trustee boards to take professional advice on steps that need to be taken to implement the “adjustment measure” that is available if despite their best efforts a default arrangement does not comply with the charges cap.
TPR expects trustee boards to make members aware of their right to transfer their benefits to another scheme at any age, in order to access their benefits in a variety of different ways other than by purchase of an annuity, regardless of whether or not the scheme itself offers flexible access to benefits.
TPR expects all communications issued to members about their retirement options to clearly set out the steps a member should look at taking in order to help them to make an informed decision about their benefits.
The new code provides a practical overview and an aid to trustees in complying with the increasing amount of regulation around DC Schemes and, if and when it is ultimately issued, will serve as a useful reference point for trustees to evaluate the management of their scheme. TPR envisages that there will also be further regulatory guidance on the matters covered by the new code, containing practical advice “designed to help trustee boards in running a high quality scheme”.
If you have any queries in relation to the interpretation or implementation of the new compliance requirements for DC Schemes,
contact a member of the Irwin Mitchell Pensions team.
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