Draft code of practice no.13: Governance and administration of occupational defined contribution trust-based schemes

Background

On 24 November 2015, TPR issued a consultation on a revised Code of Practice on the governance and administration of occupational DC trust based schemes. The purpose of the Draft Code is to “set out the standards of conduct and practice that [TPR expects] trustee boards to meet in complying with their duties in legislation”.

The original version of this response was submitted to TPR on 28 January 2016 on TPR’s designated response form.

In this response

Part 1: General comments for all respondents

Part 2: Optional questions on specific areas

• The trustee board
• Scheme management skills
• Administration
• Investment governance
• Value for members
• Communicating and reporting

Further comments

Part 1: General comments for all respondents

Would the scope of schemes to which the new code applies be clearer if the code was retitled to, for example, ‘Code of practice 13: Governance and administration of occupational trust-based pension schemes offering money purchase benefits’?

Yes. We agree with the proposal to retitle the Code. Where specific reference is made in the title to defined contribution schemes, there is a risk that DB schemes with DC elements may not appreciate the relevance of the Code to them.

A standalone section for AVCs, with all AVC-related information pulled together and signposted, would be very helpful for those schemes to which only certain elements of the Code are relevant.

In your view, are there any areas where you believe the new code appears to set standards that are inappropriate?

Yes.

For example, it is unclear exactly what is intended by paragraph 102, which requires trustees “to regularly take steps to engage with members […] and to consider any information provided when determining investment options to offer to members and strategies for the scheme”.

As drafted, the requirement to “engage” has the potential to be quite onerous. Is the wording intended to mean that trustees simply need to take account of member comments voluntarily made on the available investment options? As many schemes to do not currently offer a range of flexible benefit options, requiring trustees to “engage” with members as to their preferences for taking their DC benefit is likely to go beyond the statutory requirements.

In our view, some sections would work better as guidance, with the focus of the Code being limited to explaining the legislative standards. By way of example, in the section on “value for members”, we consider that the focus should be on whether the costs and charges represent value for members in the context of the services offered by the scheme (e.g. benefit options, communications, investment options), and not whether the scheme itself provides value for members. The latter would require subjective analysis on a per member basis, which goes beyond legal requirements and is likely to be a disproportionate use of funds for many schemes. Examples of how value for members can be achieved could usefully be included in the accompanying guidance.

Do you consider that any important areas have been missed in the new code?

No.

Do you have any comment on whether or not this language is sufficiently clear and unambiguous?

No.

Are there any instances where you believe the language used is not appropriate? If so, which standards are you referring to and what is the issue?

No.

Part 2: Optional questions on specific areas

 The trustee board

Does this text, on the fitness and propriety of trustees, appointing a chair, duties of the chair, and the specific requirements on relevant multi-employer schemes in relation to the composition of the trustee board, make clear the regulator’s expectations in relation to the fit and proper requirement on trustees?

Yes.

Are these standards clearly defined?

No.

Paragraph 26, for example, is in our view not representative of the process for appointing a chair of trustees. In our experience, it is generally the sponsoring employer who is responsible for appointing trustees (other than member nominated trustees), including the chair. In practice, trustees themselves often have little control over this, although where there is no chair, the appointment process is subject to regulation 22 of the Scheme Administration Regulations (SI 1996/1715). As such, we do not see the need for trustees to have an additional written process.

Similarly, the proposed requirement in paragraph 21 for regular review of the fitness and propriety of trustee board members goes beyond the strict legal requirement. In our experience, immediate action will be taken if an individual has acted in such a way that would disqualify them from being a trustee. Replacing the references to “fitness and propriety” with the term “effectiveness”, for example, is more representative of the ongoing need for trustees to assess their own effectiveness, as well as for the chair to review the effectiveness of a trustee board as a whole.

Do you believe the new code should reference any other key qualities of a chair?

No.

Are the themes identified in relation to the trustee board the right areas to be covered in the guidance? Are there any additional areas that the regulator should consider covering? Are there specific issues related to any of these areas that are particularly challenging?

We agree with the proposed themes to be covered in guidance.

Scheme management skills

Do the regulator’s standards in this area articulate clearly what trustee boards need to do in order to demonstrate how their scheme has met the trustee knowledge and understanding requirements?

TPR expects trustee board members to demonstrate their knowledge and understanding (TKU) by completing the Trustee toolkit “or an alternative measure that provides the same level of knowledge and understanding”. However, it is not clear what an appropriate alternative to the Trustee toolkit may be. We would welcome clarification as to what is envisaged by TPR.

Clarification would also be welcomed as to TPR’s expectations of hybrid schemes in relation to the TKU element of the chair’s annual statement.  It is not clear from the legislation whether the statement should be made only in respect of DC related TKU, although this is the implication.

Paragraph 40 requires an “appropriate amount of time” to be spent in running the scheme, depending on the scheme’s size and complexity. In addition, the scheme’s infrastructure should be taken into account here. Where many elements have been delegated, the trustees themselves may spend much less time on the day-to-day running of the scheme, working instead on monitoring the work of their delegates. More appropriate wording might therefore be “to ensure that an appropriate amount of time is spent by those running the scheme” or “to ensure that the scheme is managed effectively”.

Paragraph 49, refers to a requirement for a working knowledge of “practices set by precedent”.  It is not clear what is intended here. This requirement, together with those outlined in paragraphs 50 (discretions to review and change policies and practices and aspects of scheme rules) and 57 (familiarity and understanding of the impact of service providers’ terms and conditions) appear to go beyond the statutory requirements of sections 247/248 of the Pensions Act 2004.

Are these standards clearly defined?

In relation to paragraph 57, the proposed expectation on trustees to understand all relevant terms and conditions of their service providers’ contracts could be expressed by reference to taking advice, as a more accurate reflection of what happens in practice.

Do they address the key risks in relation to a trustee board’s delegation of certain tasks to service providers, including the risk that the services are not providing value for members?

[No response]

Do the standards make clear the regulator’s expectations in respect of the relationship between trustees and employers?

This section has been drafted quite narrowly, focusing principally on the information held by the employer needed for scheme administration purposes. It does not contemplate what an employer’s intentions may be for a scheme. A key aspect of the relationship between trustees and the scheme’s sponsoring employer is that trustees need to understand the employer’s reward framework, budgets (for communications, for example), general aims and how the scheme fits into its plans. All these factors contribute to the employer’s decisions regarding benefit design, structure, strategy, and the introduction of new elements, such as flexibilities and decumulation options.

A paragraph on interacting with employers regarding intentions for their schemes would therefore be useful.

Are the themes identified in relation to scheme management skills the right areas to be covered in the guidance? Are there any additional areas that the regulator should consider covering? Are there specific issues related to any of these areas that are particularly challenging?

We agree with the proposed themes to be covered in guidance.

Administration

Do the standards address the key risks around scheme administration?

Paragraph 71 refers to “procedures” to be adopted by trustee boards to check that whoever carries out their scheme administration has appropriate training and expertise. Guidance as to what such procedures might entail would be welcome. In the same paragraph, the draft Code makes reference to procedures for ensuring continuity of service in the event of a change of administrator personnel or provider. In practice, this will generally be covered in the administration agreement.

We fully support the use of technology to assist trustees in the running of their schemes. However, the adoption of new technologies must be appropriate to each scheme and its membership. We therefore consider that references to “developments in technology” in paragraph 75 should make it clear that account needs to be taken of the suitability of any developments for members, as well as the associated costs.

In meeting the standards, will trustee boards improve the quality of the administration service used by their scheme and increase the likelihood that it will deliver value for members, whether that service is in-house or outsourced?

In addition to the importance of business continuity for trustees, we would welcome focus in the draft Code (for example, at paragraph 72) on continuity plans for employers and third party providers, given the potential impact on a scheme of issues affecting their businesses.

Paragraph 80 refers to investment of contributions within three working days – a reduction from five working days in the current DC Code. We question the rationale for this. In practice, a three day turnaround can be difficult to achieve. By way of example, larger schemes and master trusts which run their contributions on a set process may not be able to hold unreconciled contributions.

As the paragraphs relating to promptness and accuracy set out practical suggestions for trustees rather than a description of the legal requirements, we consider that these would sit better in guidance rather than in the Code itself.

Paragraphs 87/88 set out certain expectations in relation to the reconciliation of contributions and investments, and, where errors are identified, suggest that processes are amended to prevent further errors. In practice, it may not be workable in all cases to change administration contracts already in place. These requirements go beyond the legislative requirements, with potential cost consequences for schemes that they may be unable to meet.

Are these standards clearly defined?

No. See above.

Page 24 of the consultation document sets out a number of aspects of administration which we have identified that may benefit from more detailed guidance being included in the supporting ‘how to’ guidance for this section of the new code. Are these the right areas to be covered in the guidance? Are there any additional areas that the regulator should consider covering? Are there specific issues related to any of these areas that are particularly challenging?

[No response]

Investment governance

Is this standard clearly defined?

Please see earlier comment in relation to paragraph 102.

Are you aware of any barriers that exist in relation to meeting this standard?

Ultimately, this will depend upon how the standard is defined. We refer to our earlier comments in relation to paragraph 102.

Does this standard convey clearly the regulator’s intention that trustees should focus on ensuring they have an understanding of the overall security of scheme assets and on communicating that broad view to members?

No. Paragraph 112 requires trustees to “communicate the overall conclusion about the security of assets to members and employers”.  We are unclear what concern is being addressed and what message TPR is anticipating being conveyed to members.    In addition, it goes beyond the relevant legislative requirements which require due consideration to be given to asset protection under regulation 4 of the Investment Regulations (SI 2005/3378).

It is impossible for any trustee to conclude that members’ are 100% secure.  Irrespective of what investment structures they choose assets are always at risk of market failures.  To convey that message to members may act as a disincentive to pension savings and damage trust and confidence in the trust-based arrangement.  We think that the most a trustee board could sensibly say is that the scheme’s investment structure offers market standard security.   However, there is a risk that some boards would not take that pragmatic approach and could inadvertently alarm their membership.

Alternatively, if all trustee boards give members a similar message (that the scheme’s asset security is as expected in the market) we question what assistance this is to members.  It may encourage members to view pension schemes akin to bank accounts, yet without the benefit of instant access.

At the heart of being a trustee is the duty to act in the best financial interests of members.  Trustees are required to undertake an asset security assessment and satisfy themselves that appropriate security is present.  We see no advantage in communicating the outcome of this duty, when trustees do not have to communicate the outcomes of all other duties, to members.

Do you agree with the regulator’s approach to the new requirements for default arrangements?

Yes.

Taking the section on Investment governance as a whole, do you believe the regulator has articulated clearly the additional legal requirements that relate to default arrangements?

Yes.

We would welcome the inclusion of information and examples on effective investment strategy mapping in the guidance.

Page 28 of the consultation document sets out a number of aspects of investment governance which we have identified that may benefit from more detailed guidance being included in the supporting ‘how to’ guidance for this section of the new code. Are these the right areas to be covered in the guidance? Are there any additional areas that the regulator should consider covering? Are there specific issues related to any of these areas that are particularly challenging?

[No response]

Value for members

Do you agree with the view expressed in relation to the concurrent use of the terms “value for money” by the FCA and “value for members” by The Pensions Regulator? The new code sets out our overall view on the new requirement for trustees to assess value for members in paragraph 119.

Paragraph 118, which deals with the annual calculation of charges and transaction costs, could be problematic in practice. An example of this may be access to such information where delegation has already been made to a bundled provider.

Is our approach articulated clearly?

No.

This is not an entirely black and white issue. For example, who pays the charges can change in practice. Value for members should be seen as part of the bigger picture.

We consider that paragraph 123 could be deleted, as paragraph 122 on its own adequately covers the key areas for trustees to consider when assessing value for members.

Do you agree with the regulator’s approach to how employer cost absorption should be viewed in the context of the legal requirements relating to VFM?

[No response]

Page 30 of the consultation document sets out a number of aspects of value for members which we have identified that may benefit from more detailed guidance being included in the supporting ‘how to’ guidance for this section of the new code. Are these the right areas to be covered in the guidance? Are there any additional areas that the regulator should consider covering? Are there specific issues related to any of these areas that are particularly challenging?

[No response]

Communicating and reporting

Does this text make clear the regulator’s expectations regarding trustee boards’ responsibilities in this area (subject to the government’s consultation on retirement risk warnings as referenced on pages 14-15)?

We consider that paragraph 140 should be covered in the guidance rather than the Code, as its focus is not about compliance with the law.

We note that it is not clear what should be communicated to those individuals past target retirement age (paragraphs 148-152) – the law itself is not yet clear on this.

The wording in this section of the guidance does not usefully add to the Disclosure Regulations. Therefore we feel that it would simply be better to note that the Code asks for compliance with disclosure requirements.

Are these standards clearly defined?

In our view, the annual statement wording would be better placed in the governance section, and the SIP information better placed in the investment section.

Page 33 of the consultation document sets out a number of aspects of communicating and reporting which we have identified that may benefit from more detailed guidance being included in the supporting ‘how to’ guidance for this section of the new code. Are these the right areas to be covered in the guidance? Are there any additional areas that the regulator should consider covering? Are there specific issues related to any of these areas that are particularly challenging?

[No response]

Further comments

We welcome the opportunity to comment on the draft Code.

In particular:

• We welcome the move to shorten and simplify the new Code.
• However, there are still some areas which lack clarity, as noted in response to some of the questions above.
• The Code needs to reflect how schemes operate in practice.
• Information on TPR’s expectations in relation to compliance with Regulations 18a and 18b of the Disclosure Regulations could usefully be added to the Code.