Better workplace pensions: Putting savers’ interests first – Sackers’ response to consultation


On 17 October 2014, the DWP published a Command Paper which includes its response to the consultation on minimum governance standards and certain questions on transparency.  The Command Paper DWP is now consulting on draft regulations on governance and charges in in occupational pension schemes providing DC benefits.

In this response

General comments

We welcome the opportunity to comment on the draft regulations and the general move to improve governance in DC schemes.

The timescale for introducing the new requirements is very tight. Schemes are grappling with many issues currently, including the introduction of the flexibilities announced in the Budget, and the requirements of the Pension Regulator (TPR)’s DC code.  Given that many schemes are in the process of altering their benefit structures as a result of these changes, having to comply also with the requirements of the draft regulations will mean a significant amount of new work for trustees.  It would therefore be very helpful if all the requirements of the current consultation could be subject to a transitional period to allow the Budget 2014 measures to bed down first.

There are a number of areas which merit further consideration and we outline our specific comments below.


Default fund charge cap

We are concerned by the current definition of “default arrangement”. In practice, it could be difficult for the trustees of most schemes to assess whether 80% of each of the scheme’s participating employers’ workforce are in one of the scheme’s funds.  The information necessary to carry out this assessment may not be readily available to the trustees and it could be time consuming (and costly) to do so.  It would be easier for trustees to assess their scheme against a simpler measure, looking at members across the scheme as a whole instead.

If the definition cannot be revised, we would suggest adding a requirement for employers to provide trustees with the information necessary to carry out the assessment within a reasonable period.

In respect of closed AVC arrangements, our understanding is that the policy intention is that the charges cap is not intended to apply. However, many schemes have closed AVC arrangements that only have one investment option, and a number of clients have queried whether such closed AVC funds are caught by the charges cap requirements on the basis that they are “default arrangements”.  It would be helpful if the legislation could be simplified so that it is easier to identify which arrangements are in scope.

A number of clients have identified legacy DC arrangements (that are not AVCs) and AVC funds that are still receiving small amounts of additional contributions from a small number of members. Very similar issues to those that arise in the context of closed AVC arrangements apply in these contexts, and clients are concerned that the difficulties and costs that could arise would be disproportionate to the benefits that could be achieved for members.  Is there scope to extend the exemptions or to apply easements?

Governance standards

We are concerned that exempting small schemes from the new minimum governance standards will mean that there is no disincentive to these types of schemes being set up for pensions liberation purposes.

Annual statement regarding governance

It is not clear what form the annual statement should take. Is the intention that it should be similar to a scheme’s statement of investment principles (SIP) or does the DWP envisage a separate document which sits below the SIP and deals with its implementation, with supporting evidence appended?  It would be helpful for there to be guidance on what the documentation should consist of.

Appointment of a Chair of trustees

The current regulations require the chair to be appointed by the trustee board. This could upset the balance of power in certain schemes.  Often the scheme’s sponsoring employer will have the power to appoint the chair of trustees, either through the scheme rules or articles of the trustee company.  In such a situation is the intention that the scheme rules or articles of the trustee company would be overridden?

An alternative could be to make the power to appoint the chair a joint power if a scheme’s documentation at a certain date (perhaps 17 October 2014; the date the Command paper was published), gave the power to appoint a chair of trustees to the sponsor.

We note that it is possible to appoint a professional trustee body as the chair of trustees. In this instance, is it necessary for the trustees to specify which individual is appointed?  We appreciate that TPR will require the individual to be named in the scheme return.

Who should sign the annual statement?

We note that the chair of trustees is required to sign an annual statement. However, if a scheme has a chair of trustees and also a chair of its DC sub-committee (who in practice would normally take ownership of DC governance and compliance matters) who should sign the statement? Under the current draft regulations it appears to be the former but this may not be the most appropriate person if the work has been carried out by the chair of the DC sub-committee.  Would it be possible to allow for signature to be delegated, where appropriate?

Who should sign the annual statement where the chair is a professional trustee body – must it be a named individual from that body?

Demonstrating trustee knowledge and understanding (TKU)

The draft regulations require trustees to “describe” the extent of their compliance. It is not clear what this will involve.  For example, will they be expected to submit evidence of how their TKU obligations have been met?  It might be more practical to adopt a “comply or explain” approach along the lines of TPR’s template governance statement.

In addition, is it intended that the requirement will be limited solely to TKU directly connected with DC issues, or would trustees’ wider TKU experience need to be included?

Obtaining the relevant information

Much of the information required to be included in the annual statement (for example, as to core financial transactions), will not be within the trustees’ direct control, and so the co-operation of the scheme’s administrator will be required. In practice, this will mean that service level agreements with administrators will need to be updated to enable trustees to meet this requirement.  The amount of work and cost involved in updating such agreements should not be underestimated.  We would therefore suggest allowing a period of grace for compliance in year one.  Without additional time to renegotiate such agreements, we consider that this requirement could place a significant burden on trustees and put them in a weak negotiating position with their scheme administrators, which may not be in members’ interests.

In addition, in recognition of the fact that much of the information will need to come from administrators it would be helpful to include a corresponding obligation on them to provide, within a reasonable period, such information as the trustees need to complete the annual statement. Similarly, as some information around core financial transactions will be required from the employers’ payroll function, they should also be required to provide the necessary details within a reasonable period.

Interaction with the DC code

Under TPR’s DC Code of Practice, trustees already have a duty to publish an annual governance statement, with the first such statement due at the end of the 2015/15 scheme year. There is considerable confusion amongst trustees about how this will be affected by the new annual statement requirement from April 2015.

Will schemes need to comply with both the chair’s annual statement requirements and TPR’s governance statement by producing two separate statements for the same scheme year? This would seem unduly onerous.  Also, an AVC fund in a DB qualifying scheme will be exempt from the new annual statement requirement but, unless the TPR’s DC Code is amended, will still be required to provide TPR’s governance statement.  It would be helpful if this could be addressed as a matter of some urgency as it will help schemes to manage their limited resources more efficiently and plan their course of action for 2015.

Default arrangement: Members’ best interests

Regulation 4(2) of the Investment Regulations requires assets to be invested in the best interests of members and beneficiaries and, in the case of a potential conflict of interest, the sole interest of members and beneficiaries.   We note the DWP’s intention to extend this requirement, in respect of the default arrangement, to schemes to which regulation 4(2) does not apply.  In our opinion, explicitly stating that there is a duty to act in members’ best interests in relation to the default fund suggests that a different duty applies in other areas (i.e. otherwise there would be no need to confirm this duty applies in relation to the default). It would be helpful to understand if there was any specific reason why default funds should be any different from other funds in this respect.

Transaction costs and charges

There will be circumstances in which it will be in members’ interests to switch funds, for example where the default fund is consistently under-performing. Whilst switching costs are excluded from the charge cap on wind-up, we consider that where it can be demonstrated that switching funds is in the best interests of members while the scheme is ongoing, related charges should also be validly be excluded from the cap.

The consultation notes the expectation that “trustees will maintain the necessary records to demonstrate compliance with the charges measures”. It is unclear exactly what trustees will need to record in this regard.

Independent trustees

The definition of trustees who count as non-affiliated for the purposes of draft regulation 27(2) deals clearly with the independence element of this role, but does not require such a trustee to be “professional”. We consider that there should be a requirement for professional standards here.

In addition, the definition refers to a “trustee body”. This therefore excludes professional trustees who work on their own account and in our view can be reasonably widened to include such individuals.

Value for money

It will be challenging for trustees to assess the extent to which charges and transaction costs represent good value for members. Such an assessment is very different to checking each investment fund’s suitability and performance, and will involve a change in behaviour across the industry as a whole.   This seems to be recognised in a policy sense, particularly with regard to the transparency aspects of the Command Paper which will not be fully in force until later in 2015/16.  It seems inconsistent not to apply a transitional period for compliance with this aspect of the new minimum standards in the meantime.  We agree that a set of guiding principles which builds on those in TPR’s regulatory guidance for DC schemes would be helpful to assist trustees with their evaluation.