Phil Duly surveys the issues surrounding DC pension governance

Automatic enrolment will see millions of workers joining a pension scheme for the
 first time over the next few years. Most will be enrolled into DC pension schemes, and the success of the pension reforms will rely on these schemes being designed and maintained appropriately.

With the aim of driving up standards, the government published a draft code of practice in July 2013 on the governance and administration of trust-based DC schemes. Once finalised, this will provide practical guidelines on the requirements of pensions legislation, and will set out standards of conduct and practice expected from trustees. The code will be underpinned by a number of DC principles and quality features necessary to deliver good member outcomes.

The forthcoming code of practice for trust-based schemes highlights the current contrast in governance responsibilities between trust and contract-based pension schemes.
Employers play a central role in the initial design of contract-based schemes but currently have no continuing governance responsibilities, other than ensuring contributions meet regulatory requirements and are paid on time. This light-touch regulatory approach has seen a sharp rise in new schemes being written on a contract-based basis over recent years.

We agree that all members should be protected, irrespective of the type of workplace pension scheme. The question is the role employers should play in the governance of contract-based schemes, given that employers are not a party to the legal policies of these schemes. Practicality must also be considered, as contract-based schemes and their sponsoring employers will range in size right down to schemes for single members.

Laudably, many employers already engage in governance on a voluntarily basis. Relative to the overall benefit spend, governance is not costly, will influence positive decision-making by the workforce and will give staff members the feeling of an enhanced level of protection.

The key to the effectiveness of employer governance is both an understanding of the factors that can be influenced and professional advice on the continued suitability of these factors – including: choice of provider; charges borne by members; appropriate contribution decisions; appropriate investment decisions; and appropriate at-retirement decisions.

Workforces differ, and there are no one-size-fits-all solutions for the above key areas. Additionally, multiple solutions may be appropriate in some circumstances for a single workforce, such as where there is clear segmentation. Employers will need to consider in the context of their workforce how to interpret the term “appropriate”, and decide on a suitable communication strategy to engage with the workforce to inform it or influence behaviour.

Employer governance is sometimes undertaken by way of a governance committee and in other cases on a more informal basis by those involved with operating the scheme, including finance, personnel and payroll. ‘Terms of reference’ can be helpful to clarify the scope and objectives of the committee, and this can also cover its composition, operating arrangements and decision-making or referral powers.

Committees comprise of well-meaning but sometimes ineffectual people. We believe that for medium to larger-sized schemes, consideration should be given to the appointment of an independent trustee, although in this regard they would be fulfilling a professional guidance rather than a fiduciary role. Although this would add some cost, we believe it would lessen the requirement for internal resource and inject professional knowledge, and help to ensure that a programme of relevant and ongoing governance is maintained.

The presence of a governance committee and appointment of professional representation may also provide reassurance to the workforce (and to trustees where a contract-based scheme is replacing trust-based provision) that the arrangement is being appropriately managed.

Other aspects of governance are undertaken by the pension providers, who largely believe that their systems and controls offer protection for members at a similar level to those of well-run trust-based schemes.

The government believes the overall regulatory architecture of workplace pension schemes is sound, and it has no current plans to fundamentally change the arrangements for regulating contract-based schemes.

The Pensions Regulator (TPR) will continue to promote the use of voluntary governance committees for contract-based schemes, and will be publishing a new guide for employers on setting up such committees during the summer of 2013.

TPR will also be jointly publishing a document with the Financial Conduct Authority in autumn 2013 that will set out in more detail how the regulation of workplace contract-based pension schemes operates.

All the signs are that governance of contract-based schemes will remain voluntary, which we believe is necessary due to the varying sizes of these schemes and their sponsoring employers. However, should the requirements on employers operating contract-based schemes be increased, we may see increased use of master trust schemes, where the governance duties are largely outsourced to the provider.

We welcome the above documents, which were expected to be published in summer and autumn 2013, and this will be timely before an influx of employers new to pension provision, or at least new to DC provision, as a result of automatic enrolment. We trust that the documents will help employers to understand their role in relation to contract-based schemes and give practical guidance on the voluntary governance measures that they can undertake.

Phil Duly is a consultant at Barnett Waddingham