The Famous Five - what are the top priorities for DC schemes?
Helen Ball looks at the key issues for trustees of defined contribution schemes.
Helen Ball looks at the key issues for trustees of defined contribution schemes
- Governance should be the key priority for DC trustees
- As online tools become increasingly prevalent trustees will remain ultimately liable for meeting legal disclosure requirements
- Trustees will be legally responsible for the actions of their administrator and so any contractual terms need to be up to scratch
Trustees of occupational defined contribution (DC) schemes have had a lot to contend with recently and we all breathed a sigh of relief after the Chancellor's latest speech. But now that the Budget blight has lifted (in the short-term at least) what comes next?
From the work that we are doing right now, it appears that the focus of most trustees is on the following five areas:
1. Governance
This should be top of the "to do" list. It may sound boring, but it is now the most basic requirement for all DC schemes after new legal requirements came into force last April. The Pensions Regulator will fine trustees who do not submit their scheme return or chair's annual statement on time.
It is also campaigning for greater trustee knowledge and understanding. Trustees need to check their risk registers and internal controls procedures and brush up their training plans.
2. Investment
As a consequence of the retirement flexibility changes and introduction of the charge cap on "default arrangements", many schemes have reassessed their investment options.
This can involve mapping existing funds across into new ones and/or moving platform providers. Trustees must first check there is power under scheme rules to move funds without consent and get appropriate investment advice (in writing) before doing so. It is also important to assess what the security of the assets will be in their new home, as mentioned by the Pensions Regulator in the draft DC code.
3. Administration
Trustees will be legally responsible for the actions of their administrator and so any contractual terms need to be up to scratch. Some administration agreements are looking outdated now in the light of new DC flexibilities and the increased use of automated technology.
There are occasions where some administration work is being done in a vacuum because it is not covered by the current agreement. This opens up a liability risk for the trustees. Bear in mind that the Pensions Regulator's new draft DC code considers it the "bedrock" of a well-run scheme, so ignore this at your peril.
4. Communication
With online tools and websites becoming the "norm", we are now living in a world that is increasingly dependent on technology. Watch out for who is taking responsibility for this.
Some employers are understandably keen to take charge, but the trustees will remain ultimately liable for meeting legal disclosure requirements. It is important to ensure that these are being met, regardless of how glossy the communication materials are.
5. Employer engagement
It is increasingly common for employer representatives to attend trustee meetings and take an interest in scheme budgets (often because they are the purse holder for meeting scheme costs). Ask about their plans and how they fit in with trustee priorities to minimise any potential sticking points which could occur further down the line.
So, even without the further tax changes, there is still plenty to be getting on with.
When looking at these priorities, there are two themes which are evident from the current environment:
The first relates to scale. It is clear from the Pensions Regulator's recent survey on the DC landscape that many auto-enrolment members are ending up in schemes of significant scale such as master trusts. This could be a blessing (in cost and value terms) but from a regulatory perspective it raises a potential downside risk (in terms of things going wrong across a large operation).
We could see a mandatory assurance framework and/or specific legislation covering these in the future. So the moral here is to choose a master trust carefully.
The second relates to the increasing overlap between the work of the Financial Conduct Authority and the Pensions Regulator. Whether this is due to the introduction of retirement flexibilities (and the blurring of the line between occupational and contract based pensions) or the outcome of recent studies on transaction costs and financial advice, their approaches are being drawn closer together. As legal advisers, we increasingly have to factor this into the advice that we give to our clients. It will be interesting to see how this develops in the future.
Helen Ball is head of defined contribution at Sacker & Partners LLP
More on Law and Regulation
Guy Opperman: Bill is a pathway for safer, better and greener pensions
In the first of a five-part series of articles for PP, pensions minister Guy Opperman sets out how impending legislation will improve pensions for members.
Why you must be proactive to address risks in the 'new normal'
Tim Shepherd and Beth Brown look at the legal implications of working from home and how pension professionals can mitigate the risks.
TPR posts sharp increase in use of frontline powers against schemes
The Pensions Regulator (TPR) has substantially increased the usage of its powers against trustees – posting a sharp rise in the use of formal information gathering powers and High Court production orders during the three months to the end of September....
Pension Schemes Bill passes final stages of the House of Commons
The Pension Schemes Bill has completed its third reading, crossing its latest hurdle in the House of Commons.
MPs vote down Pension Schemes Bill automatic guidance amendment
An amendment to the Pensions Schemes Bill which would have seen people given a pre-booked Pension Wise appointment ahead of accessing their retirement savings has been defeated.
