Last month, we published a reminder of the Pensions Regulator’s six core defined contribution (DC) principles (you can access the article here). In this bulletin, we turn our attention to the Regulator's updated Code of Practice on governance and administration of trust-based money purchase schemes (the DC Code), which was laid before Parliament on 9 May and is expected to come into force in July 2016.
The new DC Code has been updated and streamlined to highlight the key requirements for employers and trustees. It applies to schemes with two or more members and covers all forms of money purchase benefit provisions within a trust scheme. Helpfully, it allows a proportionate approach to be taken for AVC-only provision, but the underlying legislative requirements for AVCs should also be taken into account.
The DC Code covers six main areas:
1. Trustees
- a chair of trustees needs to be appointed with the chair signing an annual chair's statement;
- member nominated trustee requirements need to be met; and
- multi-employer schemes require to meet representatives and independence requirements.
2. Scheme Management
- 'appropriate' time must be spend on running the scheme – the amount will depend on size, complexity of scheme and complexity of any particular issue;
- internal controls and risk management procedures should be in place, including identification of risk, maintenance of a risk register and target dates to address any risks;
- trustee knowledge and understanding requirements must be met;
- adviser appointments and management of these relationships with clear roles and responsibilities should be in place;
- effective engagement with the employer is also seen as vital with trustees being expected to have a full understanding of the employer's responsibilities and work with them to help carry them out, and
- processes for monitoring and dealing with conflicts of interest.
3. Administration
- a core focus on good administration is expected along with monitoring administrators on an ongoing basis;
- core financial transactions should be processed promptly and accurately with electronic processing wherever possible;
- administrators should be subject to service levels to ensure prompt processing;
- legislative timeframes should be considered maximum and not 'work to' timescales.
4. Investment Governance
- investment governance is critical, with trustees expected to have working knowledge of investment matters for their scheme. They should carry out reviews of investments or take appropriate advice, clearly focus on default funds and have an appropriate choice of funds;
- basic timings set down for investment of calculations should be observed:
- 3 days for a daily dealing cycle and 5 days after a recalculation exercise;
- accuracy is paramount and data should be received at least annually with proper record-keeping and effective processing underpinning;
- documentation underpinning the processes will be key, including the statement of investment principles;
- setting and review of investment strategies and fund performance will need to be carried out regularly with a clear focus on timing of reviews and also on security and liquidity of assets; and
- default arrangements with a view required on what type of arrangement amounts to a default arrangement.
5. Value for Members
- to address the key risk of poor value for members, trustees need to manage value. Trustees are required to assess value by review of charges with transaction costs covered in the annual review statement. The code recognises 'low cost' does not necessarily equate to good value and Trustees need to ensure that this is carefully considered and managed;
- communication with members is seen as key to value and will underpin the process.
6. Communication and reporting
- communication with members should be in plain English and allow for member engagement. In terms of reporting, Trustees should have a structure to ensure all reporting obligations are met on time.
The Pensions Regulator has also published a series of draft guides intended to help Trustees implement the new DC Code. Consultation on these guides closed on 11 May 2016 and the Regulator’s response is awaited. We will issue a further update following publication of the final drafts.
In the meantime, Trustees of DC schemes are urged to consider how the new DC Code might affect their schemes, and take any steps needed to ensure compliance. For detailed advice on how the DC Code could affect you, please get in touch with your usual Pensions contact.