Sackers’ Response to Better workplace pensions: Further measures for pension savers

In this response:

• Background
• Respondent information
• General comments
• Administration
• Master trusts
• Trust-based governance
• Transparency

Background

The DWP’s command paper published on 27 March 2014 proposes a range of measures aimed at improving the quality of workplace DC pension schemes.  The measures are driven by the large number of members now joining auto-enrolment schemes and follow the Government’s consultations on minimum quality standards, pension charges and the OFT market report on DC workplace pensions.

Respondent information

Sackers is a firm of solicitors specialising in pensions law.  We act for in excess of 800 pension schemes, including household names and a number of FTSE-100 clients.  The views expressed in Sackers’ response to this consultation have been collated following discussions with a sub-group of the firm’s solicitors.

General comments

We welcome the Government’s commitment to improving standards of governance and transparency in workplace pension schemes.   We also support the suggestion that the measures should be implemented by means of legislation rather than through codes of practice or guidance – this will ensure consistency of treatment across the spectrum of workplace arrangements (both trust and contract based) which is a key feature of the proposals.  However, care needs to be taken to ensure that trustees and IGCs are not overburdened with compliance and reporting requirements, at the expense of the day-to-day running of their schemes.

As a general comment, it appears to us that there is a great deal of experience in the occupational trust-based sector that could help inform the development of the new IGCs.    Whilst a trustee will never be the same kind of animal as an IGC, it should be possible to introduce similar features between the two.  However, there are a number of areas where the current proposals would not achieve parity as between trust and contract-based arrangements.  For example, the duties of trustees include a reference to certain knowledge and competencies which are necessary to run the scheme, but there is currently no equivalent express duty upon IGCs.  It may be that such a result could be achieved in other ways, perhaps under the proposed new FCA rules, but this is not clear from these proposals.

Administration

The DWP encourages schemes to take advantage of the new Pensions Administration Standards Association accreditation programme that was launched in October 2013 and which is designed to help ensure that all schemes meet the required minimum administration standards and that underlying processes satisfy TPR’s requirements.  Accreditation of administrators could be a useful tool for trustees and IGCs, facilitating their selection of an administrator that meets minimum governance standards.

We consider that there are also a number of other pensions industry initiatives in train that will help trustees and IGCs ensure that their scheme is being administered to a good standard.  These include TPR’s template governance statement, which will aid the monitoring of governance standards, and the new reporting requirements to be introduced for trust-based schemes from April 2015.  Whilst we recognise that high standards of administration are essential towards ensuring the security of members’ benefits, care needs to be taken to ensure that those running pension schemes are not faced with disproportionate compliance requirements and related costs.

Master trusts

Given the large volumes of members that master trusts are expected to attract, it is crucial that such schemes maintain high standards of governance.  As trust-based schemes, compliance with TPR’s DC code is already required.  In addition, the code is well supplemented by the new master trust assurance framework, which aims to help trustees demonstrate to potential and existing customers (employers) that their schemes meet high standards.

Independence standards

We agree with the DWP’s observations that certain models of trust-based scheme, such as master trusts that are associated with vertically integrated providers and run for profit, have the same potential for conflicts of interest that are recognised in contract-based schemes.  As such, it would be reasonable to adopt similar requirements regarding independence of membership as for contract-based governance.

However, master trusts give rise to specific issues which need to be taken into account.  Member representation, for example, may not be straightforward in every case, given that a typical master trust can ultimately expect to provide benefits for members from a large and diverse range of employers.  It will be important that any detailed requirements for member representation are both proportionate and efficient.

Definition of “independent”

The proposed definition of “independent” at Annex B of the command paper is broadly reasonable.

In our experience, it can be very valuable to have trustees with significant background knowledge of a scheme.  Whilst we recognise the reasons for limiting an individual’s appointment to a maximum of three terms, the careful management of continuity (also listed as a requirement in Annex B) is also crucial to ensure value for money. The proposals suggest this is a “provider” responsibility, but this may sit equally (if not better) with the independent trustee board/IGC chair themselves, who will be closer to the work being conducted by the trustee/IGC and the role that individual members play.

Application to corporate trustee boards

We agree with the proposed application of the independence standards to those master trusts which have a corporate trustee board and to those which are unincorporated.

Where an independent trustee firm is appointed as the corporate trustee, there may need to be some further consideration around the proposal to limit the number of terms that can be served.  Continuity could clearly be an issue here. Given the benefits of a long-term relationship with a particular scheme, we consider that there may be good reasons for alternative suggestions.

Trust-based governance

Quality standards

The proposed quality standards set out in Annex B of the command paper are reasonable and (save for the new reporting requirements) tend to reflect what many of our clients’ schemes already achieve in practice.

However, where the quality standards apply to master trusts, further thought should be given to the requirements for default strategies.  As noted above, the nature of master trust arrangements means that they attract a diverse range of employers.  Therefore whilst the trustees might make available a range of funds which could be used as default funds, it is the employers who are generally likely to be in a better position than the trustees to provide a statement as to how a particular strategy is appropriate for their own members.

Chair of trustees

In our experience, well run pension scheme trustee boards operate with a chair of trustees.  This point of focus and accountability helps the efficient running of the trustee board, both at and between meetings.  As such, we consider that introducing a requirement to have a chair of trustees will reflect the current reality for most schemes.

Reporting requirements

We consider that well run schemes will engage with the new reporting requirements, demonstrating their compliance with the new minimum quality standards.  For schemes generally, they have the potential to channel standards of administration and governance towards best practice.

Transparency

In unbundled trust-based arrangements (including master trusts), we envisage that the proposal for new mandatory disclosure and reporting requirements have the potential to lead to greater focus on fund management costs and, ultimately, better value for money for members.