Guides to support Code of practice 13: Governance and administration of occupational trust-based schemes providing money purchase benefits – Sackers’ response to consultation

Background

TPR is consulting on a series of new guides aimed at helping trustees know “how to” implement the draft revised DC code which is due to come into force in July 2016. The guides have been designed to support the new DC code for occupational trust-based schemes which provide money purchase benefits, and set out ways in which trustees can show that they are complying with the law.

The original version of this response was submitted to TPR on 11 May 2016.

General comments

We welcome the opportunity to comment on the draft guides. We find these generally helpful, but have a number of specific comments which we outline below.

The trustee board

The first draft guide is helpful in setting out some of the responsibilities of the trustee board, from appointment through to succession planning and overall composition of the board.

However, much of the guidance is of general application, and we wonder if an emphasis on DC aspects would be more welcome here. We understand that TPR is looking to update its TKU guidance at some point in the future, so perhaps some of the comments here could be built into that update.

The role of the chair

In the section dealing with “the role of the chair”, it would be helpful to focus on particular issues that will be faced by the trustee chair of a DC scheme and the skills and experience they will need. On page 7, the guidance notes that “the chair should have a good overall knowledge of pensions”. As this is DC specific guidance, it would be appropriate to make reference to particular knowledge of DC pensions. Otherwise, it would seem that a higher standard is being set for DC schemes than DB schemes.

Page 8 explains the need to check scheme rules “and other relevant scheme documents” in relation to the process for appointing a chair of trustees. With many trustee boards set up as trustee companies, it would be helpful to make specific reference here to the need to check the trustee company’s articles of association.

Succession planning

The draft guidance (on page 7) suggests that as part of the induction process, the trustee board could “consider appointing established trustees as mentors”. Whilst such an approach can be helpful in terms of helping new trustees learn about processes and procedures, care should be taken to ensure that only practical guidance is given with personal views not passed on. There is a risk of former trustees becoming constructive trustees, or, if not, still exerting influence over the decisions of the board.

Master trusts

As the draft guidance notes, master trusts are subject to additional requirements. One of these is the need to have a process in place to encourage scheme members, or their representatives, to make their views known on matters that affect them; the chair’s statement must include a description of how this has been achieved. In our view, this is not clearly reflected in the description on page 10, which suggests that the composition of the trustee board must include member representatives.

Scheme management skills

As we note above in relation to the first draft guide, the second is also presented in terms of broad trustee guidance, rather than focusing on issues that are specific to DC schemes. More DC specific examples would be helpful.

The draft guidance (on page 5) notes that “many trustee boards require support from outside the scheme”. It would be helpful to indicate here whether this is intended to refer to support from functions such as a pension manager and payroll, or external advisers.

Obtaining and improving knowledge and skills

The draft guidance (on page 5) also refers to the sharing of experience by professional trustees “subject to confidentiality agreements”. In our experience, such obligations can be wider than those found in a specific “agreement” (for example, professional trustees will also be under legal duties of confidentiality as trustees, not always contained in confidentiality agreements) and therefore suggest that the reference to “agreements” is replaced by “obligations”.

Checklist for reviewing contracts

The example checklist for reviewing contracts (page 9) is helpful. However, clarification of the type of contract that this is aimed at would be welcome. Our understanding is that it is aimed at administration contracts and consultancy agreements. Similar clarification would be helpful in the section on “monitoring performance” (page 11) of the type of service providers (for example, administrators) that are assessed in practice against documented targets.

Monitoring performance

In the event that there has been continued poor performance by a service provider, trustees should, as the guidance notes, consider making a change. The draft guidance also suggests that trustees “discuss this possibility with the employer”. Whilst this may be appropriate in some cases, it will depend on a number of factors, such as whether the employer is a party to the agreement, who meets the administration expenses (the employer or the members), and how quickly the trustees need to make the change. We therefore suggest that this is amended to read “discuss this possibility with the employer, where appropriate”.

Working with employers

We are pleased to see this aspect of scheme management covered in the draft guidance. However, the way in which trustees work together with employers in practice will depend on a number of factors, including the balance of powers in the scheme rules.

It is also worth reflecting the need to take account of issues beyond the pension scheme itself, such as the employer’s wider benefit package, strategy for communicating with employees and the employer’s approach to the provision of financial advice for its workforce.

Example risk register

The table on page 17 is a useful starting point. The addition of worked examples would aid understanding of potential risks and ways of managing them.

It would also be helpful to include a link in this section to TPR’s whistleblowing guidance.

Administration

We found the draft guidance on administration very helpful, in particular the information on service level agreements.

Given that schemes take different approaches to administration (ie using a third party administrator or in-house team), it is worth making this clear. An introductory section would help trustees in understanding the different roles and responsibilities of different kinds of administrators.

It would also be helpful to make it clear that trustees should have an agreement in place with their administrator, whether they are a third party or in-house provider.

Administration reporting

Administration reports should be sufficiently flexible to allow them to be adapted as a scheme’s profile changes. This could be reflected in the guidance.

Administrator training and experience

Continuity of the administration team is important in ensuring that a scheme is well run. In relation to this, the guidance could include a recommendation to consider measures to ensure continuity of key individuals on the team.

Disaster recovery and business continuity planning

The draft guidance notes (on page 11) that, where a scheme is very small and the administration is not complex, the scheme’s business continuity plan (BCP) “may not need to be very sophisticated”. The example given is where it is run by a small in-house team within the HR department. In our view, this is not necessarily the case. Where all the expertise is invested in one person, or a small group, in-house, the loss of that knowledge and experience could have significant consequences for the scheme. It is therefore important to ensure that the BCP is sufficiently detailed, so that someone unfamiliar with the scheme could understand it. This should include job specifications for the in-house team.

The last paragraph on page 11 states that “you will have more control over the details of the BCP” [our emphasis]. In our experience, this is not necessarily the case and it would be preferable to replace “will” with “may” in this sentence.

Core financial transactions

Page 13 notes the need to consider from a member’s perspective what timescales they would consider to be reasonable and prompt. As members expectations will be affected by what they have been told about the scheme’s processes, it would be helpful to note this explicitly, and suggest trustees check what indicative timescales they have provided to the member.

Transfers

The consultation asks whether the speed of completing a transfer of money purchase benefits would be improved if TPR recommended a timescale, from the point of a member’s initial request, within which a transfer should be completed. In our view, this would not be helpful. Trustees are subject to statutory time limits within which they must deal with a transfer request. To introduce an additional layer of turnaround targets could serve to put undue pressure on trustees, which could lead some to conduct less thorough due diligence (particularly around suspicious transfers and potential pension scams) in a bid to meet those targets.

The draft guidance (on page 17) suggests that trustees may wish to refer to the marketing materials of the platforms available for facilitating standardised information and the electronic processing of transfers. In our experience, providers of these services (the examples given are Origo Options and Altus transfer gateway) are not available to all schemes. In addition, despite the footnote explaining that TPR “does not officially endorse these services”, the inclusion of named providers could be perceived as an endorsement.

Data security

Employers are generally treated as data processors for the purpose of the Data Protection Act . Trustees must have a written contract with data processors, containing prescribed information, for data processing purposes. It would be helpful to note this.

It may also be useful to alert trustees to the forthcoming legal changes to the data protection regime, and to the fact that they will need to ensure that their arrangements for processing data are compliant with this.

Investment governance

Investment delegation structures

Other than day-to-day investment decisions (which must be delegated), a scheme’s investment delegation structure will depend on the mandate given to the investment manager. This could be made clearer on page 5.

The section on “things to consider” in deciding whether an investment sub-committee is required helpfully sets out specific questions for trustees to consider. In our view, the most significant of these is the complexity of the scheme. As such, this point would benefit from being placed as the first item in the list, together with a note that it will also depend on the level of expertise on the trustee board.

An additional consideration, alongside the size of scheme membership, will be the overall value of the scheme’s assets.

The last paragraph on page 5 suggests that trustees “should aim [our emphasis] for an appropriate balance between independent, employer and member nominated trustee” members for an investment committee. In practice, this will depend on the composition of the trustee board as a whole, which will not in all cases include a professional trustee. We therefore suggest that it is made clear that while balance is appropriate, this should be in keeping with the general composition of the board.

Fiduciary management

It would be helpful to flag that the appointment of a fiduciary manager does not relieve trustees of all investment duties in the guidance. It would also be helpful to make clear that the degree of delegation will depend on the mandate agreed by the trustees.

Financial and non-financial factors

In our view, the text on page 7 could be adjusted to more accurately reflect the Law Commission’s guidance on how trustees should consider financial and non-financial factors.

In essence, while trustees may take into account environmental, social and governance factors when making investment decisions, (subject to very limited exceptions) they should only take ethical factors (which are always “non-financial”) into account where members will share the moral view point and it will not result in lower returns. Clarification, in particular of the second bullet point on page 7, is needed here.

Allowing for the future

Trustees considering how an arrangement can cope with future changes may wish to look at the speed with which they can change funds, and the associated costs involved. We suggest these considerations are also flagged.

Bespoke arrangements

The draft guidance refers to “white-labelling” but does not explain what this is or how it works. It would be helpful to do so, perhaps accompanied by an illustrative example to explain how white-labelling works (and how it differs from a bespoke arrangement).

Additional fund options

The draft guidance notes that the needs of the membership must be taken into account when deciding how many fund choices to offer. One example given is the “financial implications of” ESG factors. It would be helpful if the use of that expression here could be explained.

Fund strategy and performance

There are three key elements for trustees to review: the fund manager; the way in which the overall strategy is performing; and the appropriateness of that strategy for the membership. We would welcome further comments in the guidance on each of these strands of the review process.

Changing investment funds

This section needs to include a reference to the impact on the charges cap and also the impact of white labelling on switching funds.

Member notice

In relation to black-out periods, it is essential that members are informed as soon as practicable, so they have the ability to make any intended investment switches or transfer requests before black-out if appropriate. We therefore suggest that reference to timely communications is made here.

Security of assets

We welcome the recognition that trustees may not always be able to definitively establish the extent of asset security available.

The section starts by discussing FSCS coverage. In our experience there is a general misconception amongst trustees that the question of asset security is purely a matter of FSCS compensation. The order of this section in the guide may further this misconception. The FSCS is a vehicle of last resort. There are other commercial (e.g. due diligence) and legal (e.g. contract terms and legal structures) protections that should be first considered. FSCS compensation is only relevant in the event of a financial default of an FCA authorised firm in the investment chain. We suggest referring FSCS cover as a last resort towards the end of the section.

We suggest removing the reference to the FSCS helpline. The FSCS may find the volume of calls difficult to handle. They may also be unable to provide the necessary information to allow trustees to fully understand the level of compensation that might be available. Trustees may rely on the answers from the helpline rather than professional advice.

This is an extremely complicated topic. Communicating it to members runs the risk of disincentivising members from pensions savings because, even when using the most robust investment structures, trustees will be unable to confirm there is no risk to members’ money in the event of a default in the investment chain. We suggest removing the need to communicate on this topic with members. The role of a trustee is to make decisions in the interests of members, and choosing a safe investment structure already falls within that role.

If the requirement to communicate is maintained, the Code and guide need to be consistent. The guide says it is ‘best practice to communicate’ to members and that trustees may wish to describe the range of protections available and outline any advice they have received. This contradicts the DC Code, which said TPR ‘expects’ trustees to communicate only their overall conclusion to members. We would recommend that only a requirement to communicate the ‘overall conclusion’ is retained.

We agree that including a reference to the Security of Assets Working Group guide is very helpful.

Appendix 1: Default arrangements

This appendix is helpful.

Value for members

The draft guidance states that an assessment of value for members should include “only those services that members pay for or where members share the cost with the employer”. “Services that members pay for” seems a narrow interpretation of value for members (in particular excluding aspects that the employer pays for), and different from the description of value for money in the current guidance. The resulting perception could be that TPR is consciously moving towards a narrower description of the value for members assessment than the one required by legislation.

It then also makes reference to “overall value for money” and refers to factors which “do not form part of your legal duties”. The draft guidance appears to advocate a higher test (value for money, rather than value for members), which is potentially at odds with the draft DC code and scheme administration regulations, but it is not clear in what circumstances this is the case.

In addition, the illustration assumes that most charges are member-borne. However, in our experience this is not the case, as various costs and charges get picked up by the employer (eg many DC scheme rules require the employer to meet all administration costs, often with only investment charges being payable by the member). Based on the illustration provided, it is unclear how trustees should carry out the value assessment where all or most charges are met by the employer. It would be helpful if the guidance could provide a split explanation of how to make the assessment, which considers separately value for members where employers meet costs, and where the members do.

Transaction costs

In practice, costs are often expressed as a “total expense ratio”, making it difficult for trustees to break down the costs as suggested in the box on page 8. This needs to be reflected in the examples given.

Ongoing monitoring and evaluation

The draft guidance suggests that trustees “conduct a mid-year ‘sense check’ of any developments since [their] last review”. In our view, this risks placing a cost strain on trustees.

On page 15, the draft guidance suggests that trustees “could consider meeting or sharing information with other trustee boards to compare approaches and discuss ideas”. Whilst there are various forums for trustees to meet to share experiences, this will not always be possible for trustees to achieve on a regular basis.

Communicating and reporting

Knowing your members and seeking your views

Trustees need to take care not to make assumptions as to how members will best engage. For example, it may not always be the case that a young workforce wants pension information via electronic devices. A wrong assumption could lead to costly but ineffectual communication, particularly for trustees of small schemes with less access to professional advice.

It would be helpful for the guidance to include examples of different ways of engaging with members, which may be wider in scope than simply communicating to them. In our experience, segmentation of the membership can show positive results in helping members to engage with the pensions (and often, wider financial education) message. Once appropriate methods for engaging with a scheme’s members have been selected, the messages which need to be communicated can then be dealt with.

Retirement options and generic risk warnings

Page 11 suggests that personalised risk warnings can be provided to members. Great care should be taken in this area as it can be difficult for trustees to provide personalised risk warnings without straying into the territory of “advice”. It would be helpful to understand what is envisaged here, and further guidance on what trustees should or should not do in this area would be helpful.

Providing information at retirement – example of good practice process

Page 13 sets out a table of steps that trustees could use as an example of how to communicate with members in the run-up to retirement. We are aware that the legislation assumes a two-stage process, and presume that this is why the guidance does too, but we would note that in practice, one pack with all the required information and option forms, tends to be issued for members. To do otherwise – in stages as suggested in the draft guidance – creates a considerable additional burden in terms of administration and cost.

Post retirement communications

This section would benefit from more detail, including information on tax and the money purchase annual allowance trigger.

DC underpins

In relation to schemes which provide DB benefits with a money purchase underpin, the phrase “where the underpin actually applies” (on page 16) needs clarification.

The draft guidance notes that for the purposes of the chair’s annual statement requirement, it will not always be necessary to assess on an annual basis whether the underpin bites for any particular member for whom retirement benefits are not in payment. The guidance could clarify whether this is therefore intended to be a check only of members who are in the run-up to retirement.

In our view, it could be confusing for members if a chair’s statement were to be produced in some years but not in others, which would seem to be the potential impact of this position.

It would be helpful for the guidance to outline in addition TPR’s views on the reverse position – ie DC schemes with a DB underpin, as this is more common in practice.

Generic risk warning example text

The leaflet published by the Money Advice Service (“Your Pension: it’s time to choose”) contains more detail (albeit that they are not presented as “risk warnings”). It could be helpful to tie the examples in the draft guidance in with the MAS guidance.