The Pensions Regulator's updated DC code outlines what it expects of trustees, but it is not mandatory. James Phillips explores what trustees can take from its recommendations.
On the face of it, the new defined contribution (DC) code from The Pensions Regulator (TPR) seems very different.
It is shorter, clearer and accompanied by six how-to guides to steer trustees through the management and decision-making of their schemes.
But, what has changed, and can trustees really cohere to every guideline?
The focus of the code has changed very little, with the regulator seemingly aiming to clear up confusion about who the code applies to, while making it easier to navigate. However, it also builds in recent legal changes, and provides greater detail on new issues facing pension schemes.
For example, the updated code places a greater emphasis on how schemes should interact with environmental, social and governance (ESG) issues. These concerns should be included within schemes' investment strategies, and provide an opportunity to engage members even more.
Redington vice president of DC Jinesh Patel says members may be more inclined to increase contributions if they understand and have some say over where their money is invested.
"There is a focus on ESG issues, which is a relatively new and quite interesting theme," he says. "More emphasis is being placed on understanding it now and putting it into investment strategies.
"There is an opportunity to engage people in pensions from an ESG theme. Some people might be more inclined to invest or make additional voluntary contributions (AVCs) if it is explained to them how and where the investments are run.
"Time will tell how many trustees and schemes take that on board."
Meanwhile, State Street Global Advisors senior DC investment strategist Alistair Byrne says trustees should have a broader understanding of members' concerns and beliefs.
He says: "There is an emphasis on understanding your members when designing an investment strategy. That's very important.
"It's thinking about the needs and objectives of your members and how you design an investment strategy that is suitable for how they take their benefits at retirement, and the appropriate level of risk.
"That's a crucial step in designing any investment strategy for a DC scheme, and it's good the code reinforces that."
What is clear is that it stresses the importance of communicating to members, and understanding how they want their scheme to be run. By doing that, trustees can be more certain they are running the scheme in members' best interests.
TPR has not outlined a strict regimen, having recognised every scheme is different and that members may have conflicting priorities. The code is flexible, making it easier for trustees to take a more proportional approach to making decisions.
However, parts of the guide are fairly detailed and this has led to previous warnings trustees may simply aim for a ‘bronze standard' approach to compliance rather than full compliance. So, can schemes really replicate the best practice recommended by the regulator?
Capital Cranfield Trustees chairman Tony Filbin believes the range of expertise on a trustee board means it should be aiming as high as possible rather than settling for minimum compliance.
He says: "On a trustee board, there is a range of skills, and you can get advice. You don't act alone. I'd be disappointed if trustees did aim for a bronze standard, because if you aim low you might not make it. I'd be aiming for gold plus, and hoping to get gold, rather than aiming for bronze and then missing it."
TPR's response is there is no perfect method to running a DC fund, as long as members' interests are reflected in the day-to-day management of the scheme.
So trustees should not feel obliged to meet all the guidelines of the code.
Pinsent Masons head of strategic development for pensions Robin Ellison adds that for some schemes it might not even be possible, and trustees should not feel bad about that, as long as they weigh up the benefits versus the costs.
He says: "The best shouldn't be the enemy of the good. Most trustees do a pretty good job, and to do their best at a disproportionate cost would be an absurdity.
"The whole point of the trustee system is not everything can happen. You need to use your discretional common sense. Trusteeship law was intended to allow sensible people to make sensible decisions on behalf of other people. With small schemes, it would be too much, and the cost would be disproportionate."
The size of the scheme and the support available to it affects its ability to comply, with larger schemes more likely to meet more of TPR's recommendations. In fact, Patel argues some schemes are almost mimicking it in its entirety.
He says: "To an extent, schemes can comply fully if they exercise the proportionality element of it. Well-run schemes are probably doing 95% of it already; they just need to revisit the code and check what updates have been made."
However, trustees only need to comply with the legal framework behind the code. So, if trustees are not required to oblige, and they should exercise their reading of it proportionate to their scheme, why should they bother to pay attention at all?
Ellison says: "The code is a statement of the obvious, and it's there to protect the regulator. A few years ago, people said there wasn't enough regulation of DC schemes, so we added a code. It was not established for DC schemes, but it's to tick a box if anything goes wrong. It is designed to protect the regulator rather than scheme members.
"We don't need a code, but parliament says we do. TPR is doing what parliament told it to do, but parliament should have kept quiet."
Nevertheless, the code does steer trustees in the right direction, outlining the legal obligations for trustees in a clear checklist-like way, making it easier to identify any weak areas.
Filbin adds: "As a chair, you're always interested in board efficiency. You never take it for granted you're doing a good job, so you're interested in benchmarking and trustee evaluation.
"The code is something to benchmark yourself against. Are there areas we could be doing better? You have all the things you need to do in the code and you can use it as a checklist.
"But you should never restrict yourself to the code; you should always be trying to go that little bit further."
Furthermore, to take a different direction to the regulator's recommended route could be more hassle than it is worth. Trustees have to assess the quality of their arrangements, but while they are not following the code, they may have to provide additional evidence to the regulator to prove their assessments.
Barnett Waddingham associate Phil Duly says: "Trustees have a legal duty to look after the best interests of members, and TPR requires trustees to assess any arrangements for quality. They expect trustees to use the code for that purpose, but trustees could use another method.
"There is a framework, so rather than developing one of their own, it's much easier to use TPR's."
The more a trustee board follows the watchdog's recommendations, the easier it will be to measure their progress against it. Patel adds that trustees should try to follow the guide as much as possible, as it will ensure their schemes give better results to their members.
"The regulator is trying to establish good practice and trustees will want to follow that guidance. They are always seeking reassurance they're on the right path. The new codes and guides have been released to deliver better outcomes for members and if trustees believe that they'll follow it."
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