DC schemes: Sackers’ response to TPR’s compliance and enforcement policy consultation

Background

TPR’s latest consultation sets out its proposed approach to compliance in relation to occupational DC trust-based schemes.  The draft policy outlines TPR’s expectations for compliance with relevant pensions legislation, as well as how it intends to proceed to enforce the law in cases of non-compliance.

In this response:

• DC Strategy
• Legislative and regulatory framework
  
• Timescale for implementation
• Structure of the draft compliance and enforcement policy
• Application of the policy
• Thematic reviews
  
• Key risk areas
  
• TPR’s enforcement approach
• Costs

DC Strategy

We welcome the current focus in the pensions industry on DC schemes, particularly as more individuals are brought into (mostly DC) pension saving as a result of automatic enrolment.

However, whilst we support the broad aims for improved governance in DC arrangements, which ultimately seek to achieve better outcomes for DC scheme members, we have some concerns regarding the overall approach.

Various strands of the pensions industry have in train (or have recently completed) a number of reviews of different aspects of DC pension provision.  These include the OFT’s DC workplace pension market study, TPR’s DC Code, the jointly published draft independence assurance framework for master trustsby TPR and the ICAEW, and the Government’s forthcoming review of DC default fund charges and its proposals to implement changes to the definition of “money purchase benefits” following the Supreme Court’s ruling in the Bridge Trustees case.  In our view, the sheer volume of work underway on issues relating to DC schemes, is at present causing unnecessary complexity for trustees and administrators of DC schemes, as they come under increasing pressure to devote time and resources to implementing multiple (and sometimes competing) strands of DC governance.

Legislative and regulatory framework

The existing legislative framework for DC schemes has generally developed from the rules governing DB arrangements.  Whilst some of the legislation is common to all schemes, there is little which is specific to DC.  As a result, there is currently no clear legislative structure on which to base a regulatory framework for DC schemes.

In our view, a clear, Government-led framework for DC schemes is needed.  This could set out a common approach for schemes based on overriding principles.  The five key areas of the DC Code (“Know your scheme”; risk management; investment; governance of conflicts of interest and advisers/service providers; and administration) would be a good starting point for this.  Such an approach would also tie in with the OFT’s recommendation that future policy and regulatory initiatives be informed by five longer term principles of scale; alignment of incentives; robust independent governance; flexibility; and simplicity and switching.

The existence of such a framework would enable TPR to ensure that its compliance policy is consistent with the overall Government strategy.

Timescale for implementation

No indication is given of the intended timescale for implementing the draft policy.  The proposals represent a significant shift in the way in which TPR will operate its compliance policy (see further below our comments on “thematic reviews”).  As such, trustees and administrators need certainty as to when TPR will start to operate its reviews, to ensure they are in a position to deal with information requests.

Structure of the draft compliance and enforcement policy

The sample regulatory options set out in the Appendix to the draft policy are very useful.  In our view, it would be helpful if the policy were simplified, setting out few key statements on TPR’s general principles for compliance that are supported by a number of examples to illustrate how TPR will operate in practice.

Application of the policy

AVC arrangements

We note that the compliance policy is to apply to “all occupational DC trust-based pension schemes with two or more members”, including DC AVCs in a DB scheme.

In our experience, a number of DB schemes operate legacy AVC arrangements.  It is important that such arrangements are properly managed.  However, we consider that a proportionate approach could be taken to compliance in relation to such arrangements.  It would also be helpful to have specific guidance of the approach for trustees of schemes with closed AVC arrangements that are small in the context of the schemes they operate.

Third parties

The draft compliance policy notes that TPR may also contact other persons or third parties, if it believes that they may be in possession of relevant information or documents.  It goes on to note that TPR can issue a range of statutory notices, including to third parties, if it believes that a breach of pensions legislation has occurred and a statutory remedy is needed to secure compliance.

We understand that the third parties TPR considers to be in scope are scheme employers, scheme administrators and scheme advisers.  It would be helpful if the policy were clearer in this respect, in particular regarding when TPR expects to use its powers against each of such third parties (and any others it has in contemplation).

Thematic reviews

TPR proposes to conduct thematic reviews, enabling it “to monitor regularly that DC schemes continue to comply with their legal obligations and have adequate internal controls in place to support good member outcomes”.

This represents a significant shift for schemes.  Currently, those involved in running occupational and personal pension schemes are expected to report to TPR when there have been breaches of the law, in accordance with TPR’s ‘traffic light’ risk assessment matrix.  The traffic light approach to reporting breaches is helpful for schemes and we consider that a similar approach could be helpful to the monitoring process.

We acknowledge that there is a need to ensure high standards of governance for all schemes.  However, the procedures for gathering information for the purposes of TPR’s reviews should not be unduly onerous, in terms of the time and resources needed to respond to TPR’s requests for information.  There may be a risk that, by requiring trustees and others to devote significant time to responding to information requests from TPR, this could be at the expense of the very standards that TPR is seeking to protect.

Related to this, the apparent shift from TPR’s existing risk based approach to more detailed, thematic reviews, will require detailed analysis of scheme records.  We wonder how TPR would meet the challenge of making available sufficient resources to conduct and conclude such reviews within a reasonable timeframe.

Finally, the policy mentions that where schemes have previously reported breaches of the law, TPR is more likely to include such schemes in the sample for thematic review.  It seems to us that this could act as a disincentive for schemes to report breaches of the law.

Key risk areas

Section two of the draft compliance policy deals with the DC risk framework, outlining the areas which TPR considers to pose the greatest threats to good outcomes to members.  In our view, the key risk areas are very broad, making it difficult for trustees and others to prioritise the aspects they most need to deal with.  It would therefore be very helpful for the various risk areas to be given a different weighting, to help trustees identify priorities for their scheme, or for particular strands within each risk area to be highlighted as key.

TPR’s enforcement approach

The draft compliance policy explains the statutory powers that are available to TPR to deal with breaches of the law.  It does not, however, cover the action that TPR will take where there have been breaches of its codes of practice or guidance.

We are aware that TPR’s codes of practice “provide practical guidelines on the requirements of pension legislation and set out standards of conduct and practice expected of those who must meet these requirements” and that under the Pensions Act 2004 (s.90(4)) “failure on the part of any person to observe any provision of a code of practice does not of itself render that person liable to any legal proceeding”.  However, this is subject to TPR’s power to issue improvement notices to direct compliance with a code of practice, with civil penalties for failure to comply.  It would therefore be helpful if this aspect of compliance (ie compliance with TPR’s codes and guidance) were covered in the policy.

Costs

The draft compliance policy does not address how, or by whom, TPR envisages the costs of dealing with compliance will be met.  As such, there is a risk that costs will be passed on to members, contrary to the objective of achieving better member outcomes.  We consider that this issue should be addressed in the final policy document.