Last month, we published a review of the Pensions Regulator’s updated Code of Practice on the governance and administration of trust based money purchase pension schemes (the DC Code), which has now come into force (available here). In addition to the DC Code, the Pensions Regulator (the Regulator) has also published a series of ‘how to’ guides to assist scheme trustees in meeting the standards expected of them. Running to over 100 pages, the combined six guides provide more detailed information on the approach the Regulator encourages trustees to take in fulfilling their duties to pension schemes with money purchase benefits.
There is a corresponding guide to cover each area of the DC Code:
1. The trustee board
The guide provides greater detail on how trustees should meet the ‘fit and proper’ test to take up office. It also sets out in detail the Regulator’s views on the mechanics of board meetings and the composition of trustee boards. It explains that trustee boards should be well-balanced and diverse, relating to not only the types of trustee but also their experience, skills and societal demographic. A mix of different individuals is deemed as being highly desirable for a trustee board, with the Regulator being of the view that this will contribute to a board being more effective.
The guide also highlights the usefulness of sub-committees in the context of complex pension schemes, and suggests that in cases of particularly large pension schemes, sub-committees could be used to effectively deploy skills and knowledge in relevant areas.
2. Scheme management skills
Notwithstanding the requirement for trustees to be ‘conversant’ with scheme documents, the guide stipulates that they are expected to regularly assess their knowledge, understanding and skills. The guide goes so far as to suggest that performance reviews are instituted by the chair of the trustee board, and highlights that steps should be taken to improve access to training for trustees e.g. by dedicating a portion of board meetings to completing training where necessary.
The Regulator also highlights some key considerations for trustees in terms of the selection of advisors, including: the capacity of and technology of advisors and their ability to integrate with employers’ systems; and effective ways of working with the trustees e.g. identifying key points of contact between the trustee board and advisors/ service providers.
The importance of good scheme administration is emphasised in this guide, with additional detail given on what is deemed to be best practice in terms of scheme administration arrangements. Trustees are advised to ensure that the content of scheme reports should reflect the size of the scheme and resources available to them. They are also reminded that reporting at an aggregate level across schemes administered by an insurer or third party administrator is unlikely to discharge them of their legal obligations. The guide also discusses Service Level Agreements (SLAs) and details that these should have features that allow the quality and accuracy of administration to be measured beyond the time taken to carry out tasks.
4. Investment governance
The Regulator encourages a pro-active approach to investment stewardship, to support trustees in meeting their investment governance duties. While it is acknowledged that most stewardship activities are undertaken by investment managers and custodians on behalf of the trustees, the Regulator encourages trustee boards to familiarise themselves with stewardship policies and take steps to influence them where appropriate. The guide goes on to define other aspects of what is considered best practice in terms of stewardship, principally in the exercise of rights attaching to investment i.e. voting rights attached to shares.
5. Value for members
The Regulator emphasises that trustees should ensure that scheme members receive good value from their pension scheme, regardless of whether they owe a legal obligation to assess and report on value for members annually. Furthermore, the guide highlights that trustee boards should agree a formal approach of assessing value for members. The Regulator proposes that trustees document the steps that they take in assessing value, and be prepared to demonstrate (via the chair of trustees’ statement) that the proper processes have been followed and relevant factors considered in delivering good value.
6. Communication and reporting
The Regulator encourages trustees to take a proactive approach to member communication and to become familiar with members’ views. The guide suggests the monitoring of social media, and spending time with the scheme administrator to listen to member calls where possible.
As is clear from the sheer volume of guidance, the regulatory expectations on trustees that manage DC funds are becoming ever more exacting. While the DC Code demonstrates the broad outline of trustee responsibilities, the six guides provide greater detail in terms of what the Regulator considers to be best practice to enable trustees to comply with their legal obligations. Trustees would be well advised to take the time to digest the information in these guides and adapt scheme practices so far as is practicable to reflect the guidance given by the Regulator.