The Pensions Regulator (TPR) has today released its updated defined contribution (DC) code of practice, as well as six guides on complying with legal obligations.
What are the key messages in the new code?
1) Not a legal obligation
TPR and pension experts are keen to emphasise the code of practice is a suggested approach and not a legal obligation. Schemes can take an alternative approach to the code, as long as they abide by the laws affecting DC schemes.
Sackers head of DC Helen Ball says: "Schemes sometimes miss that the DC code is the regulator's interpretation of legislation, and the guides are not intended to be prescriptive but helpful. It's intended to assist and guide, and schemes don't have to follow it to the letter."
The new guidance heavily emphasises the need for trustees to exercise proportionality in applying their advice, making it easier for schemes of all sizes.
Aon Hewitt principal consultant John Foster says the new code gives greater flexibility to trustees.
He adds: "The regulator is putting more faith in trustee boards to interpret and apply the guidance, rather than being prescriptive. It allows trustees to take a proportionate approach for the governance regime."
However, Ball warns a proportionate response may be particularly difficult for schemes which have small additional voluntary contribution (AVC) components, with members varying their contribution sizes.
"In one pension scheme with AVCs, you might have some members who have a big portion and others who don't. It is quite difficult to assess the proportionality of it, because different groups of members may have different values of AVCs. I think it's right to advise a proportionate response, but for some schemes it may be difficult."
3) Value for members
The updated code includes a new section on what constitutes ‘value for members', a term which has previously confused trustees. TPR's advice suggests communicating with members and working with demographic data to independently identify what may be in members' best interests.
Ball says the guide provides a good balance of advice and flexibility: "There will always be different views about what is meant by good value for members and different schemes will have different approaches. TPR really wants people to publish their chair's annual statement and learn from others. That's a mirror to what we see with independent governance committees (IGCs)."
Society of Pension Professionals (SPP) president Hugh Nolan agrees, arguing trustees should exercise common sense.
He says: "The guidance gives extra clues about value for members, but it's not a well-defined term and it never will be. The danger is if you try to define what it means, you leave yourself open to people concentrating on that and ignoring the wider issues. This is where common sense prevails - you have to judge for yourself."
4) Clearer guidance
ARC Pensions Law partner Rosalind Connor believes the code offers clearer advice, even within its slightly altered name.
She says: "What makes a considerable difference is the name of the code has changed slightly. It's changed from ‘money purchase trust-based schemes' to ‘trust-based schemes providing money purchase benefits'. It may not seem like a big thing, but they are making it clear they're not just talking about a standard DC scheme, but also DB schemes with DC elements."
5) Greater focus on ESG
ShareAction policy officer Rachel Howarth welcomes the new code for providing stronger guidance on environmental, social and governance (ESG) issues.
She says: "TPR's decision to include this guidance for trustees is extremely encouraging. The guidance for trustees is clear: they have a mandate to consider all risks that could affect the financial performance of their funds, and this includes ESG risks."
6) How-to guides
Alongside the new code, TPR has issued a set of six how-to guides to help trustees navigate its guidance.
While Nolan says these guides are particularly helpful, trustees should be careful not to misinterpret them.
He says: "The how-to guides are brilliant, but there is a danger they will be interpreted as extra rules. There are throwaway comments about trustees having to meet quarterly, and some small schemes may feel obliged to do that when it's just advice."
The new code's additional focus on scheme administration has also been welcomed.
Connor believes this is particularly important.
She says: "TPR has focused on administration in a big way. Administration has been the poor relations of pensions for such a long time, because it is not exciting and it costs money. It costs less money to do it badly than it costs to do it well. A lot of pension schemes have underinvested in administration."
"If you get something wrong you now need to have a good excuse."
The Pensions Administration Standards Association (PASA) director Sara Cook adds: "PASA welcomes the launch of the new code. We are pleased the regulator has again emphasised that good administration plays an important part in supporting good member outcomes and recommends trustees question their administrators on whether they have accreditation."
8) Importance of legal advice
Sackers' Ball says the code strongly emphasises the need for trustees to take legal advice, particularly in the value for members and communication sections.
"There is an emphasis that trustees have legal duties and must take legal advice," she says.
"There is a lot of new wording about the importance of legal advice on investment strategies and documentation. We are seeing a trend of people not seeking legal advice, and we are keen for them to be aware they need to do this, especially when they are moving members' money without consent."
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