TPR publishes suite of DC documents

Introduction

TPR’s code of practice for trust-based DC pension schemes (the Code) came into force on 21 November 2013. To coincide with the Code coming into effect, TPR has issued final versions of its compliance and enforcement policy for DC casework and updated its good practice guidance on areas not covered by the Code.

Key points

TPR expects trustees to assess their scheme against the standards set out in the DC Code.
The guidance expects trustees to assess whether their scheme provides value for money (VFM) and expects them to document their retirement process.
In 2014, TPR will begin assessing DC compliance.

The Code and guidance

The DC quality features form the core of TPR’s regulatory approach. They represent the standards and behaviours TPR expects DC trustees to attain.

The Code addresses the DC quality features that have a direct legislative underpin, while the guidance covers:

Features set by the pensions industry, rather than in legislation.
Features which legislation covers in part, where TPR would like to see schemes taking certain additional action. For example, schemes are required to offer the open market option (OMO) at retirement. But TPR would like to see schemes go further than this by offering a process which, it considers, will result in members optimising their retirement income.

Value for Money

A particular concern of TPR is that “opaque costs and charges deducted from a member’s fund can have a significant impact upon the value of their pension”. It therefore wants trustees to “ensure that all members receive [VFM]”, described in the guidance as “where the costs and charges deducted from members’ pots or contributions provide good value in relation to the benefits and services provided when compared to the other options in the market”.

The guidance sets out a model process for a VFM assessment, which is broadly as follows:

Step 1: Collating information on the total benefits and total costs of scheme membership
Step 2: Determining criteria for assessment – trustees will need to consider the profile of the membership, pot size, membership status and level of engagement, as well as the investment performance delivered to members in the context of the investment objectives
Step 3: Comparing the criteria with other schemes – what are other schemes’ charging structures, investment performance and service provision?
Step 4: Evaluating and acting – trustees evaluate the total benefits and costs of membership in relation to what the members value most, and the benefits and costs of other similar schemes.

If a scheme is not providing VFM, steps should be taken by trustees to ensure that it does. The guidance states that trustees should “act as demanding consumers” to ensure the scheme continues to offer the optimum VFM.

TPR intends to have further discussions with the pensions industry next year on how schemes can capture and report their VFM information.

Retirement process

TPR believes that in a quality DC scheme trustees will:

Ensure that a process is provided which helps members to optimise their income at retirement, and
Clearly communicate to members the options available at retirement in a way which supports them in choosing the option most appropriate to their circumstances.

To achieve this, the guidance states that “all schemes should have a documented retirement process which sets out the key activities, timeframes and who is responsible for them”. A model process is provided which covers five stages, including member communications, setting up the retirement product, and a review of the process itself.

Compliance and enforcement

From 2014, TPR “plans to undertake thematic reviews of the extent to which trust-based DC schemes are compliant with pensions legislation and associated good practice in different areas”. Where necessary, it will take enforcement action to address breaches in the underlying law.

Action

Now the Code is in force, TPR expects trustees to assess their scheme against its standards. Those who would like to make a start should speak to their usual Sackers’ contact about our Gap Analysis Service, which provides trustees with a framework for assessing their compliance with the Code and guidance.

Next year, TPR intends to publish a “comply or explain” governance statement that DC trustees can use to inform scheme members, the employer and TPR whether they meet the DC quality features (or, where the features are not fully present, how their approach is in members’ interests).