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Regulator signals intent to raise the bar for plans with money purchase benefits in draft DC Code

  • United Kingdom
  • Pensions - Defined contribution


The Pensions Regulator has published a draft new Code of Practice on the governance and administration of defined contribution (DC) trust-based schemes for consultation. The draft Code raises the bar for plans with money purchase benefits and shows how the Regulator expects trustees to approach their new legal duties to assess value for members, manage plan investments, process core financial transactions and produce an annual Chair’s governance statement.


The new Code is designed, as far as possible, to set out in one place all of the standards of conduct and practice that the Regulator expects of trustees when complying with the law in relation to money purchase benefits. In doing so it covers the new legal requirements relating to the governance and administration of such benefits that have recently been introduced, but also goes beyond this in a number of respects. The draft Code is expected to replace the existing DC Code from mid-2016. It will be accompanied by a series of ‘how to’ guides (due to be published next April), which will contain more practical guidance on how trustees can satisfy their legal duties and the standards expected by the Regulator.
Key issues
The draft Code covers a range of different areas. The key issues arising under the draft Code are:
1. Trustee effectiveness
Over one-third of the draft Code focuses on issues relating to the effectiveness of DC trustees. In particular the draft Code highlights the need for:
• any trustee recruitment process to include consideration of the fitness and propriety of candidates and for the fitness and propriety of trustees to be regularly reviewed
• the recruitment process for a Chair of trustees “to consider the leadership qualities of the candidates and their ability to drive good practice within the plan”
• trustee boards as a whole to possess, or have access to, the knowledge and understanding to properly run the plan, to ensure sufficient standards of governance and administration and to fully understand any advice they receive
• trustees to be able to demonstrate that they have considered their level of knowledge and understanding, taken steps to address any gaps and have a training and development plan in place to ensure their knowledge and understanding is kept relevant and up to date, and
• trustees to possess “certain skills” (which unhelpfully the Code does not expressly identify, other than to say that the ability to effectively manage commercial relationships with advisers and service providers is a key skill that the Regulator expects trustee boards to possess).
The breadth of these expectations shows that the Regulator is looking for trustees to be on top of their brief, to possess the knowledge and skills to run their plan effectively and to undertake regular and comprehensive training.
2. Administration

The draft Code says that “good administration is the bedrock of a well run plan” and, therefore, the Regulator expects trustee boards to consider administration as a substantive item at every regular trustee meeting. In all cases, the Regulator expects trustees to:

• have a clear understanding of the scope of their administrator’s responsibilities and the tasks which the administrator carries out
• receive regular information or stewardship reports from their administrator to enable them to effectively monitor performance
• have adequate business continuity arrangements in place and understand the business continuity arrangements that their administrator has in place and “be confident that it adequately mitigates any risks to member data and benefits”
• have good knowledge of the procedures and controls the administrator operates
• have appropriate service level agreements in place with their administrator, and
• regularly review the process for the provision of information from employers.

Alongside this trustees are required by law to have processes in place to ensure that all “core financial transactions” are processed promptly and accurately. For these purposes, the Regulator expects:

• trustees to treat all transactions which relate to the handling of member and employer contributions, and assets relating to those contributions, as core financial transactions
• legislative timescales for carrying out certain tasks or processing transactions to be treated as a maximum deadline
• contributions to be invested within a maximum of three working days following receipt by a plan and completion of a reconciliation exercise, and
• trustees to make arrangements to ensure contributions and investments, and the records relating to them, are reconciled at least monthly and that any discrepancies are resolved promptly.
These operating standards will raise the bar considerably for some plans. In particular, some may struggle to meet the expectation that contributions are invested within three working days.
3. Relationship with advisers and service providers
The Regulator expects trustees to have appropriate terms and conditions in place with their advisers and service providers and to:

• be familiar with and understand key provisions of those terms, including the scope of the services to be provided, the arrangements that are in place if the service provider is changed and any limits on liability, and
• be satisfied, as far as possible, that the terms enable the them to obtain all of the information and advice they need to make key decisions (including in relation to value for members).
This latter requirement appears to be an attempt by the Regulator to ensure that, amongst other things, trustees have a contractual right to be given all information relating to costs and charges including details of all transaction costs by third parties. Trustees may need to update their contracts with service providers and advisers (particularly in the investment field) to comply with this.
4. Investment governance

In the context of investment governance, the Regulator expects trustees, amongst other things, to:
• consider the investment strategy as a whole (not just component funds), when setting and reviewing a particular strategy, and to take account of the characteristics of different segments of members, for example, by proximity to retirement or likelihood of selecting a particular retirement option, and
• understand the protection available from the Financial Services Compensation Scheme or other sources in the event of a problem with a particular investment and to communicate about the security of assets to members and employers.
5. Value for members
Trustees are now required to annually assess and report on the extent to which member-borne costs and charges relating to money purchase benefits under their plan represent good value for members. In the draft Code, the Regulator says that, in its view:
“charges and transaction costs are likely to represent good value for members where the combination of the costs and what is provided for the costs is appropriate for the plan membership as a whole, and when compared to other options available in the market”.
The draft Code recognises that there is no uniform approach to assessing, what it calls, “value for members”, but when carrying out this assessment the Regulator expects trustees to:
• make efforts to understand the characteristics of their members and, where possible, their preferences and financial needs, and to take this into consideration
• consider the value delivered by the plan management and governance, administration, investment governance and communications, as a minimum
• consider only the extent to which the services for which members bear some or all of the  costs offer good value relative to those costs and ignore services which are paid for entirely by the employer
• keep a contemporaneous record of their approach and all supporting evidence
• document any issues with value for members and take steps to improve these areas.
Assessing value is one of the main new requirements on trustees of plans with money purchase benefits and trustees will need to invest some time to address this properly. We fundamentally disagree with the approach taken in the draft Code that the costs of any elements of the plan that are met solely by the employer should be disregarded as, in our view, this is clearly a benefit to members from being part of the plan. It may also encourage some employers to reshape the way in which costs under their plan are met.
Since, as the Code acknowledges, there is no one-size-fits-all approach to assessing value for members, it is important that trustees maintain an audit trail of the approach that they adopt and the reasons for this. This could be in the form of a “good value” policy or similar document.

6. Communications
Amongst other things, the Regulator expects trustees to ensure that:
• all communications sent to members are accurate, clear, relevant and provided in plain English, and
• provide sufficient information to members to enable them to make informed decisions.
7. Internal controls
The draft Code indicates that trustees should have internal controls in place to manage, amongst other things, the risks to which members are exposed in relation to fraud, investment and the decumulation options available to them. The Regulator also expects trustees to record on their plan’s risk register the risks identified, their evaluation of each risk and how they are managing it. Following the introduction of freedom and choice, the risks in these areas have changed significantly and, therefore, trustees need to review the risks that members face and how they are mitigating them.
8. Chair’s statement

Going forwards, trustees are required to include a Chair’s statement in their annual report and accounts detailing compliance with the new governance requirements in relation to money purchase benefits (including the assessment of value for members). The Regulator expects this statement to provide a “meaningful narrative” of how, and the extent to which, the governance standards have been complied with. It also expects trustee boards to keep a contemporaneously record and be able to evidence the actions described and explained in the statement.
A plan’s first Chair’s statement must be produced as part of the annual report and accounts for the plan year ending on or after 6 July 2015 (from 6 April 2015 to end of the plan year). This will be one of the main pieces of public output under the new regime and the first statements are likely to be closely scrutinised.
The Regulator has also confirmed that it no longer expects trustees to produce a voluntary governance statement regarding compliance with the DC quality features set out in its existing Code.
There is a lot of work for trustees of plans with money purchase benefits to do over the coming months in order to comply with their new legal requirements. The draft Code indicates how the Regulator expects trustees to approach this and in many ways it raises the bar considerably in terms of how they will be judged in the future. Although the draft Code is likely to be tweaked before it is finalised, we do not anticipate wholesale changes being made. Therefore, trustees should review the Code and identify the areas where action may be needed to achieve the required standards.
The consultation closes on 29 January 2016 and the final Code is due to be laid before Parliament in May 2016.