The Role of Trustees in DC Pension Schemes

Posted on: 4th February 2012

Background

A recent survey has shown that poor governance standards in DC pension schemes still persist and the Pensions Regulator has said that it expects to see improvements.

Because of that, the Regulator has issued a statement outlining the duties of Trustees of DC pension Schemes. These are schemes which provide money purchase (DC) Benefits, including pure DC Schemes, Schemes with DC sections and Schemes with DC AVCs.

Where Schemes offer both DB and DC benefits (hybrid schemes), the main concern is that Trustees are not giving sufficient time and attention to the DC section.

The Trustees are crucial to ensuring both good member outcomes and effective Scheme governance. Because of that, Trustees need to be “fit and proper”. They must have not only adequate Scheme knowledge but also an understanding of pensions issues which is sufficient for them to carry out their role competently. Recently, TPR has intensified its focus on DC risks and regulation to ensure that Trustees of pension schemes which provide DC benefits meet its requirements.

The Regulator’s Requirements

TPR expects Trustees of Schemes providing DC benefits to do the following:

1 Have sufficient knowledge and understanding - 
Trustees need to have sufficient skills to manage their Scheme effectively. They should formally assess the Trustee board’s capabilities and they should address DC-specific knowledge gaps promptly;

2 Address conflicts of interest - 
Trustees need to be able to show that they can act impartially, without their decisions being tainted by actual or perceived conflicts. Trustees should ensure that non-trivial conflicts of interest are suitably managed and disclosed and they should produce a conflicts of interest policy to assist with the governance process;

3 Understand the charging structure - 
Overall charges often lack transparency, so Trustees need to understand how charging structures operate and what charges are paid by members. This is because excessive costs and charges in a DC Scheme can significantly reduce a member’s fund. So Trustees should be able to show that they have assessed the overall charging structure and concluded that it offers members value for money. Charging structures should also be applied fairly to all categories of members – TPR does not consider active-member-only discounts (or deferred member penalties) to be fair or acceptable;

4 Regularly review the range of investment funds available and ensure that the default fund complies with the DWP guidance -
The DWP guidance explains that the Trustees have the overall and ongoing legal responsibility for their Scheme’s administration, management and investment decisions. Because so many members end up in the default option, the design, governance and communication of that option will play an important role in achieving good outcomes for them. The default option should therefore take into account the likely characteristics and needs of the people who will be in it. And, because it is likely that those people will not be engaged in financial decisions, decisions will need to be taken for them about their risk profile. There should be an appropriate balance between risk and return, taking account of the likely membership profile. And the charging structure should reflect this balance.

The DWP guidance goes on to consider issues such as:

  • deciding on the suitability of the default option for the membership;
  • designing the default option;
  • monitoring the performance of funds within the default option;
  • communicating information about the default option to members;
  • reviewing and/or changing the default option;

5 Invest prudently, so that assets are predominantly managed by FSA-registered (or similarly-regulated) entities -
TPR also expects Trustees, in the absence of a financial guarantee, to understand what compensation arrangements are available should an investment provider default. And also to understand the level of protection offered to members under the Financial Compensation Scheme. They should also consider carefully how to proceed in situations where compensation is not available.

6 Manage their Schemes well - 
Trustees should devote sufficient time to managing their Schemes, including meeting regularly to discuss governance issues, e.g. at least quarterly. They should assess the key risks facing their Schemes, maintain a risk register, continually assess the quality of administration and record-keeping and seek assurance that outsourced activities are operating effectively, e.g. from independent assurance reports.

7 Make members aware of the impact of contribution patterns on the overall size of their fund at retirement - 
A member’s pension fund at retirement depends on the level of contributions paid and the investment performance. Because of that, Trustees need to make members aware of the impact which contribution patterns will have on the overall size of their fund.This point echoes TPR’s recent governance survey, in which TPR mentioned communication to members a being a key area for potential improvement by Trustees.

TPR’s Statement points out that Trustees have a legal duty to ensure that contributions are accurate and paid to the Scheme on a timely basis. Trustees should therefore ensure that contribution processes and controls are ready to respond to any increased demands which might arise from automatic enrolment from 2012. They should also take reasonable steps to pursue and resolve all late payments.

Looking ahead

The Regulator says that it is committed to developing a DC framework which will enable Schemes to deliver good member outcomes. In the coming months, it aims to publish a series of statements and tools to define the criteria of a good Scheme or product. The longer-term strategy is to develop an operational framework to assess compliance with standards of good practice and behaviours.

 The effects on Trustees

Because its survey showed that poor standards of governance in DC Schemes still persist, it is not surprising that the Regulator has intensified its focus on them. Or that it wishes to ensure that Trustees have the skills and expertise which they need to run their Schemes properly. Trustees, employers and TPR would all agree that good Scheme governance leads to better decision-making, to a well-run pension scheme, to better outcomes for members and to time, trouble and money saved for all concerned.

The difficulty with all of this is that acquiring a sufficient level of skill and expertise in pensions matters takes a considerable amount of time and resources. And this is at a time when both are at a premium in Trustees’ daily working lives. Producing a risk register of the items listed by TPR and constantly monitoring progress against it can involve a lot of work for the Trustees and will require them to have very good technical and governance skills. And, clearly, someone will have to have overall responsibility for ensuring that the Scheme achieves and then maintains the required standards of governance.

This is an area where a professional Trustee can help. A good professional Trustee will have a relevant professional qualification, such as actuarial or legal, and extensive pensions and business experience. They are a bit like a non-executive Director, bringing expertise and industry knowledge, from having been involved with a wide variety of pension schemes. Adding their skills to those of the existing Trustee board can quickly improve the governance process.

Of course, a common concern of many employers is that their pension scheme is already taking up more time and resources than had been anticipated.

But the appointment of a good professional Trustee should not be seen as an additional cost. On the contrary, it should be seen as a means of speeding up the journey to that all-important goal of a well-run pension scheme and to addressing the key risks facing it. Because the purpose of running a pension scheme well is to achieve a better outcome for members and to save time, trouble and money for all concerned.

So, provided that you choose your professional Trustee carefully, this appointment could be the faster route to a well-run pension scheme, to better outcomes for members, to time and money saved and to a better night’s sleep for all concerned.

Featured in the Feburary issue of PMI News