22 December 2015 - Post by:Helen Powell
Two years ago the Pensions Regulator brought in a new Code of Practice on the governance and administration of DC schemes, and trustees and providers started work on ensuring that they were operating in line with its 31 quality features. With almost undignified haste, that Code was overtaken by events, following the introduction of DC flexible access and new governance requirements from April 2015.
As a result, a new draft Code is out for consultation, and it looks very different. The Regulator has concentrated on setting out the behaviour it expects from trustees – but some of its expectations may come as a surprise. Here are six to consider, but the draft Code contains plenty more:
1. Trustee board
Trustees are expected to have a robust and documented process for appointing a chair, which includes considering the leadership qualities of candidates and their ability to drive good practice within the scheme.
It is rare in practice for occupational schemes to have a formal procedure like this. The chair’s role is increasingly important, and the ultimate goal is a good one, but where the current chair is a senior employer-side representative, it may not be realistic to expect trustees to conduct a recruitment-style assessment of that individual’s leadership skills (even supposing that there are alternative candidates available).
2. Scheme management skills
Trustees are expected to ensure that all members, whether deferred, active or in decumulation, benefit from good governance, and to regularly review the appropriateness and suitability of decumulation options and policies, for example any restriction on the number of cash lump sums available to members.
Where trustees offer in-scheme flexible access options (particularly drawdown), it’s not surprising that the work of governance extends into the decumulation sphere – historically, an area which DC trustees have not had to consider in detail. The same principle must apply where trustees offer access via a link with an external provider – the choice of decumulation provider, and their performance and charges, should come under the same type of ongoing monitoring and scrutiny as the investment provider – and trustees need to maintain the flexibility to move to a different provider for either service if required.
Trustees can’t ‘set and forget’ their flexible access options. Information from the first few months of the pension freedoms may be unreliable – we have not yet reached ‘steady state’ in terms of DC access, so regular and ongoing reviews about what to offer, tailored to the scheme’s membership profile, will be a feature of life under the new regime.
Trustees are expected to regard statutory timescales for action as maximum periods, not as representing ‘prompt’ processing – in particular, contributions should be invested within a maximum of three working days following receipt of the contributions and completion of reconciliation activity.
Is this deadline achievable in practice? The Government previously called for evidence on setting five days as an appropriate deadline for the investment of contributions. How would this work in your scheme?
4. Investment governance
Trustees are expected to regularly engage with members about when and how they wish to take their DC benefits, and consider this information when determining investment options, including the likelihood of members wanting to take flexible access, and preferences for sustainable funds.
Is there a risk that regular member surveys on these lines increase expectations that members will be given what they ask for? Ultimately, scheme design decisions are for the trustees to take (often with input, in relation to decumulation options, from the employer because of cost and HR implications). Members may also argue that trustees should use their statutory override power to provide flexible access despite any provision of the scheme rules to the contrary. Assessing demand will be important, but trustees will need to draft their communications with care.
5. Value for members
Trustees are expected to document their process for assessing value for members, and to understand ‘value for members’ as including scheme management and governance, administration, investment governance and communications, using the new Code as a starting point.
In other words, compliance with the rest of the Code becomes part of the value schemes provide to members under this part of the Code. The repeated emphasis on documented processes reflects the Regulator’s belief that proper process will drive better outcomes – while this may be true in many cases, trustees may well feel the onset of documentation fatigue.
6. Communications and reporting
Trustees are expected to make members aware of their right to transfer out at any age in order to access their benefits flexibly, regardless of whether the scheme itself offers flexible access.
There is a potential tension between making members aware of their transfer rights and the encouragement (soon to be a requirement) for trustees to communicate risk warnings when members explore transfer options. Is there a risk that members could become confused by mixed messages?
Codes can change quite dramatically as a result of the consultation process, and you have until 29 January 2016 to let the Regulator know your views, so it’s worth taking time to read the draft Code (link here) and considering how these and other issues could affect your scheme.
Helen Powell is a PSL Counsel at Allen & Overy LLP