Consultation on DC Code: Sackers’ Response

Background

TPR consultation on “Regulating work-based defined contribution pension schemes” sets out a new framework that TPR intends to use to help it regulate the governance and administration of DC schemes.  This framework is underpinned by TPR’s six DC principles and an updated version of the DC “quality features” which represent the standards and behaviours that TPR expects trustees to attain.

In particular, the consultation seeks views on:

• TPR’s DC regulatory approach;
• a new draft DC code of practice; and
• new draft regulatory guidance.

We have limited our observations to general comments on the draft documents and have not sought to answer every consultation question.

In this response:

• General comments
  
• DC Quality Features
  
• Cross references to other Codes of Practice
  
• Smaller schemes
  
• Master trusts
  
• Charges
  
• Default “funds”
  
• AVCs
  

General comments

We welcome TPR’s commitment to helping trustees and others achieve good governance (and ultimately good member outcomes) in DC schemes.  We also welcome the fact that TPR is taking this opportunity to collate its guidance for DC schemes in one place.

The purpose of Codes of Practice issued by TPR is to provide practical guidance:

• in relation to the exercise of functions under pensions legislation; and
• regarding the standards of conduct and practice expected from those who exercise such functions.

The codes are supplemented by regulatory guidance which is “intended to help trustees, employers and others understand what the law requires with regard to regulating pension provision”.

In our view, the draft Code is both too long and too detailed to achieve these objectives in a meaningful way.  In addition, both the draft Code and Guidance are very repetitive and there is much overlap between the two.

The draft Code is also very prescriptive (with frequent use of the terms “must” and “should”).  As drafted, there is a risk that trustees will attempt to use the whole document as a checklist, whereas the focus should naturally fall on the quality features.

It would be more helpful for trustees and others if the Code were to set out a smaller number of high level principles, with these being supplemented in the Guidance with more detail and examples.

By way of example, paragraph 20 of the draft Code notes that the code is split into the following five sections:

• know your scheme;
• risk management;
• investment;
• governance of conflicts of interest and advisers / service providers; and
• administration.

These headings are very helpful and we believe that if the Code and Guidance were split under the same headings (which they are not, at present), trustees could follow the guidance more effectively.

DC Quality Features

In addition to the general repetition and overlap, there is a considerable amount of overlap between the DC quality features themselves.  In our view, the quality features would have a greater impact, for example in terms of being understood and readily used, if they were reduced to no more than 10-15 in total.

Cross references to other Codes of Practice

Paragraph 23 of the draft Code cross-refers to the Codes of Practice on Trustee Knowledge and Understanding (TKU) and Internal Controls.  It would be helpful to have clarification as to whether what follows is intended to replace or to be read alongside the existing codes (and the scope guidance for TKU).  If it is to be read alongside the existing codes and scope guidance, that raises a question as to whether those documents will be updated to reflect any new features set out in the DC Code.

Smaller schemes

The draft Regulatory Approach document identifies small and medium sized schemes as a distinct category.  While TPR has examples of such schemes that display quality standards, TPR goes on to note that there are a number of barriers that may inhibit good member outcomes.  Despite this, the draft Code and Guidance do not specifically address the needs of smaller schemes.  In our experience, we come across many well run, small and medium sized schemes and a number of these are being used by employers to meet their auto-enrolment duty (even if they have fewer than 999 members).  It would therefore be helpful for TPR to maintain a balanced approach in the Draft Code and Guidance by reflecting the needs of such schemes, as well as larger trust based schemes and master trusts.

Master trusts

Given the number of master trusts that have emerged to support auto-enrolment, we welcome TPR’s focus on this type of scheme.  It may be helpful to develop this further, for example by dedicating a separate section in the Code and Guidance to master trusts.  This could include, among other things, a section on costs, as this will be a crucial issue in ensuring good member outcomes.  There will already be master trusts in operation with costs provisions built into their documentation with sponsoring employers that it may not be possible to change on a unilateral basis.

Charges

The draft Code and Guidance also cross-refer to the joint industry code of conduct on charges.  To assist trustees and others, it would be helpful to incorporate here the key principles on charges into the Code itself.

Default “funds”

The draft Code and Guidance use a number of terms, apparently interchangeably, to describe default funds, for example, “funds”, “strategies” and “options”.  It would aid understanding to employ just one of these terms.  In our view, “strategy” may be an appropriate term to use here, given that schemes may have more than one fund that they use for this purpose.

AVCs

The draft Code notes that it applies to all types of money purchase benefits, including AVCs in a DB trust based scheme or section.  However, there is no mention (in the draft Code or Guidance) as to how AVC benefits should be treated.  Given that such benefits have different characteristics to ‘standard’ money purchase benefits accrued in an occupational pension scheme, the governance and risks involved can be different.  It would be helpful for these to be set out in the Code or Guidance.