Occupational pension schemes: Code of Practice on Defined Contribution Benefits
Author: Suzanne Burrell
Applies to: England and Wales
This article will look at the code of practice on defined contribution benefits and the annual Chair of Trustees' Governance Statement.
The Pensions Regulator's amended code of practice on the government's administration of occupational trust based schemes providing money purchase benefits came into effect on 28 July 2016.
The aim of the amendments to the code is to reflect developments in the legislative regime applying to the governance of defined contribution benefits which have come into force since the code was first issued in 2013. Specifically, new governance measures were introduced by the Occupational Pension Schemes (Changes in Governance) Regulations 2015 including the requirement for the chair of trustees to produce an annual governance statement on money purchase benefits. Additionally the Pensions Regulator recognises that with auto-enrolment an increasing number of employees will be members of defined contribution schemes.
The code applies to all schemes providing money purchase benefits including additional voluntary contributions and any defined benefit schemes which provide a money purchase underpin. With additional voluntary contributions, the Pensions Regulator recognises that trustees should consider the risk to members in the context of the AVCs' value relative to members' overall benefits and apply a proportionate approach in meeting the standards within the code.
As well as the code of practice itself, the Pensions Regulator has also published six 'How to' Guides to accompany the updated code of practice together with a self-assessment template which is designed to help trustees assess their scheme against the standards in the code.
The code of practice covers the following areas:
- Trustee board
- Scheme management skills
- Investment governance
- Value for members
- Communications and reporting
The 'How to' Guides cover each of these six key areas and provide examples of the regulator's views on best practice in particular areas.
Annual chair's statement
The requirement to produce an annual governance statement applies to schemes providing money purchase benefits (although not where the only money purchase benefits are additional voluntary contributions). The purpose of the governance statement is for schemes to demonstrate how they have met new minimum quality standards prescribed in legislation.
The Pensions Regulator, in the code has said that it expects the statement to be written so that it provides a 'meaningful narrative' of how, and the extent to which, governance standards have been met. The Pensions Regulator's guidance accompanying the code says that it expects trustee boards to document and evidence the actions it describes in the statement but that this paper trail need not be included as part of the statement.
Our expectation is that the bulk of the required information will have been obtained by the trustees throughout the year as part of regular reports provided by administrators and investment providers and advisers. If service providers are not producing the information needed by the trustees to produce the chair's statement then the trustees will need to engage with those providers to ensure that they are receiving the information needed to comply with their duties as trustees.
In summary, the chair's statement must include the following content:
- Latest statement on default investment arrangement
- Details on any review of the default investment arrangement and changes made as a result of that review
- Descriptions of how the requirements for processing core financial transactions have been met
- Level of charges and transaction costs during the scheme year (or range of charges and transaction costs where there is more than one fund)
- Report on the transaction costs that the trustees have not been able to obtain
- Assessment of the extent to which charges and transaction costs represent good value for members
- Description of how the requirements for trustee knowledge and understanding have been met
Additionally, the Pensions Regulator has produced a scheme assessment template so that trustees can assess their scheme against the DC code and to help complete the chair's governance statement. The template can be found here: http://www.thepensionsregulator.gov.uk/docs/DC-scheme-assessment-template.doc.
The code comes at a time when the Pensions Regulator has launched its 21st century trusteeship discussion paper. This discussion paper is designed to seek views on what the Pensions Regulator can do to support raising the standard of pension scheme trusteeship following the regulator's 2015 survey of defined contribution, defined benefits and hybrid schemes.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.