Quality standards in workplace defined contribution pension schemes: Response to DWP call for evidence
From its latest call for evidence on quality standards in workplace DC schemes, the DWP is looking to gain a greater understanding of the extent to which key standards of governance, investment and administration are currently exhibited in workplace DC arrangements. These are important considerations, given that the majority of schemes used for automatic enrolment are DC and because the proposed new system of automatic transfers will take place initially only between DC schemes.
In this response:
- General comments
- Investment – default options
- Administration and record keeping
- General approach to legislative minimum standards
We welcome the Government’s focus on DC schemes, particularly as more individuals are brought into (mostly DC) pension saving as a result of automatic enrolment and the forthcoming introduction of automatic transfers.
However, whilst we support the Government’s broad aims in relation to the running of workplace DC schemes, we have some concerns regarding the overall approach. Currently, there are various sections of the pensions industry that are tackling issues relating to DC pension provision. These include:
- TPR’s new code of practice on the governance and administration of occupational DC trust-based pension schemes (due in force in November 2013). The code is underpinned by TPR’s DC quality features and is supplemented by a number of statements, Q&A guidance notes and detailed discussion papers (finalised guidance to accompany the code is awaited).
- The OFT’s DC workplace pension market study, which is in the process of being finalised. The OFT is in discussions with the industry, the Government and regulators about some of the issues raised in the study.
- The NAPF is also seeking to raise the standards of default DC investment funds, with its Pensions Quality Mark currently exploring new minimum standards.
- Charges: following the ABI agreement on the disclosure of pension charges and costs in January 2013, a Government consultation on capping DC default fund charges is expected in the autumn.
- A proposed development and assessment framework for master trusts.
- A consultation on Government plans to implement changes to the definition of “money purchase benefits” following the Supreme Court’s ruling in the Bridge Trustees case is also awaited.
Given these various strands of DC scheme review, the trustees, managers and administrators of DC schemes are coming under increasing pressure to devote time and resources to implementing multiple (and sometimes competing) strands of DC governance. A collective approach, or at least the pooling of research and experience once the various consultations and reviews have been concluded, would help to ensure that trustees and administrators of workplace DC schemes receive consistent messages, enabling them to focus on the essential elements of good governance.
Generally, good governance measures will help trustees and administrators to ensure that they have meaningful processes in place that encourage sound and transparent decision making, as well as effective procedures for managing risk effectively.
Whilst specific measures of good governance will ultimately depend on factors such as the type, size and history of the scheme, certain essential features will be common to all workplace DC schemes. By way of example, these include:
- ensuring the right infrastructure is in place for a scheme, including effective administration systems and the use of sub-committees, where appropriate, to ensure that decision making is as efficient as possible;
- suitable training to ensure that all trustees on the board are competent to carry out their role, with additional, specific, training for those on sub-committees (eg investment or discretions). Similar requirements would apply to a governing body of a contract-based scheme (see further below);
- where sub-committees are used, the committees should have in place terms of reference and appointment procedures that are appropriate and reviewed regularly to ensure they remain so;
- access, where necessary, to advisers (eg legal, investment etc) to enable the trustees to carry out their functions effectively; and
- the timely management of conflicts of interest (actual and potential).
In our experience, many trust-based DC schemes, whose trustees act in accordance with their duties, exhibit such features of good governance. TPR’s increased focus on this area in recent years has helped to improve standards and awareness across the board.
The DWP’s possible approaches
The trustee board is a model which has proved to work well for occupational pension schemes. Trustees are subject to a number of duties, emanating from statute, case law and regulation, which help to ensure high standards of governance. Applying a similar system to contract-based schemes, such as group personal pensions, may help to ensure consistent, high level standards across the board. However, as the two regimes differ significantly, thought will need to be given as to the extent to which the trustee board model can be applied to contract-based schemes.
In principle, we agree that it is helpful to ensure that there are individuals on the governing body who are in a position to represent different interests, or provide a challenge function to those running the scheme. However, thought will also need to be given to ensuring that any requirements introduced for a governing body are appropriate for the type of arrangement and that they do not unnecessarily burden employers who have expressly chosen to use this type of arrangement (in many cases, precisely because the employer should be able to rely on the provider to govern the scheme appropriately).
In addition, further thought/clarification is needed in relation to the proposal that the majority of individuals on the governing body should be independent.
The call for evidence refers to the DWP’s May 2011 guidance for offering a default option for defined contribution automatic enrolment schemes. In our view, this guidance generally provides a good overview of the standards required of default options for DC schemes and, we agree that the information covered in this guidance (which includes the governance, design, review and communication of the default option), are the key steps for trustees and others involved in operating a default option.
In our experience, trustees take account of the DWP guidance, particularly in the run up to an employer’s auto-enrolment staging date and once the default fund is in use.
Record keeping is just one aspect of pension scheme governance that has been a particular recent focus for TPR, with a deadline in December 2012 for complying with “common data” targets and with targets for the standards of “conditional data” to be set by trustees in conjunction with the scheme administrator.
As with all aspects of pension scheme governance, it is important for trustees to focus on outcomes – in this case, maximising members’ DC pots. In working towards this goal, trustees will often need to take a pragmatic approach, for example, in respect of legacy benefits where member records may be incomplete or out of date and, as TPR’s guidance recommends, take proportionate steps towards compliance.
The call for evidence asks which stages of administration and record keeping are so critical they should be set out in legislation. In our view, there are already detailed legislative requirements in the regulations on disclosure, scheme administration and automatic enrolment regulations, among others. As noted above, given the various strands of current focus on workplace pensions, a concerted approach to the supervision of DC schemes is, in our view, preferable to seeking to implement additional legislation at this time.
We note the Government’s view that “increased scale could make it easier for some occupational schemes to achieve good standards of governance and charges”, albeit that there is currently insufficient evidence to justify an intervention to the extent of specifying a particular minimum (or maximum) scheme size. The call for evidence goes on to note that, “if the lack of scale is identified as a barrier then options for otherwise expanding the scheme should be considered, alongside the option to close the scheme and move members to a pre-existing larger one.”
In our experience, advising occupational pension schemes of all sizes, the size of the scheme itself is not necessarily a contributing factor to good governance. Whilst economies of scale may in some cases offer smaller employers access to a wider range of pension scheme service providers and other advisers than they may otherwise have, it is not the fact that a scheme is large and with significant resources that ensures good governance. Rather, good governance stems from the attitude of the employer who is making available the pension arrangement in question, as well as the trustees or manager with overall responsibility for the scheme. The potential impact of a scheme’s size will simply be one of a number of factors to consider in assessing whether the scheme is well governed.
The overall approach proposed generally appears to be a sensible one. However, as noted above, we consider that priority should be given to ensuring a consistent and consolidated approach by Government, TPR and pensions industry bodies, to the governance of workplace pension schemes, rather than to introducing multiple additional layers of legislation and regulation.