TPR sets the standard for DC schemes

Introduction

On 10 January 2013, TPR published a consultation on a new code of practice (the “Code”), regulatory guidance (the “Guidance”) and regulatory approach relating to the administration and governance of work based DC pension schemes.

In this Alert:

• Key points
• Background
• New DC Regulatory approach
• Draft Code and Guidance
• Work based personal pensions
• Next steps

Key points

• The new DC regulatory framework will be based on delivering good member outcomes. It is built around DC quality features which represent the standards and behaviours TPR expects trustees to attain.
• Occupational DC trust based schemes (excluding “micro schemes”1) will be expected to demonstrate how they comply with the DC quality features, or to be able to explain any inconsistency with them.
• Work based personal pensions (contract based schemes) are being separately considered but TPR’s intention is for similar principles to apply in due course.

Background

TPR considers that the changing DC environment and the introduction of automatic enrolment “places greater importance on the good governance of DC arrangements and the quality standards that apply within them”. It has therefore designed a new framework to regulate the governance and administration of occupational DC trust based schemes.

New DC Regulatory approach

The draft regulatory approach document describes how TPR will educate and enable DC trustees to fulfil their obligations and explains how it plans to enforce the legal requirements.

TPR expects trustees to “comply or explain” their scheme’s consistency with the DC quality features. It also intends to undertake “thematic and targeted scheme governance reviews” to identify good and bad practice and any need for enforcement action. This will include asking trustees and providers for evidence of consistency with the Code and Guidance, and capturing information on the Scheme Return.

Where TPR considers there is a risk to member outcomes, it could take enforcement action. At the minor end of the scale this could be a warning letter, but more major concerns could lead to penalties2 or the prohibition of a person from acting as a trustee.

There will be a specific focus on master trusts (due to the additional risks these pose) with an expectation that master trusts will implement voluntary disclosure and independent assurance to demonstrate such schemes are credible and viable.

Draft Code and Guidance

The Code and the Guidance are underpinned by TPR’s six DC principles3 and the DC quality features. The two documents, which are designed to be read together, apply to trustees of all occupational DC trust based schemes with two or more members4 which offer the following types of benefit:

• money purchase benefits (including AVCs under occupational DB schemes); and
• money purchase benefits with a DB underpin.

The Code

The Code is intended to provide practical guidance to trustees about the legal obligations and duties which relate to delivering good member outcomes for occupational DC schemes. These include:

• Know your scheme;
• Risk management;
• Investment;
• Governance of conflicts of interest and advisers / service providers; and
• Administration.

It builds on the existing codes of practice for trustee knowledge and understanding and internal controls. There is, for example, an emphasis on devoting sufficient time to DC trustee training and DC matters at trustee meetings. There is also a focus on DC default fund investment strategy and the processing and outsourcing of DC financial transactions via service providers.

In addition, practical guidance has been drafted to address specific issues relevant to particular types of schemes, such as master trusts.

The Guidance

The Guidance aims to inform, educate and assist trustees with good practice standards of governance and behaviours which will drive good member outcomes. It includes considerable detail around how trustees should:

• assess the value for money of the scheme;
• make sure members are aware of the costs and charges they bear;
• make sure employers are aware of the costs and charges of the scheme they select;
• offer contribution flexibility to members;
• offer a process which helps members to optimise their retirement income; and
• deliver effective communications to members from joining to retirement.

It also suggests that trustees should carry out an overall strategic review of the scheme every 3 years.

Member communications are covered in a separate overarching section as well as in other sections which relate to specific areas: investment options, costs and charges, contribution flexibility and retirement options.

Work based personal pensions

The FSA is responsible for work based personal pensions (also known as contract based schemes). The FSA is working with TPR to ensure similar levels of protection are provided to all work based DC schemes.

An initial analysis indicates good alignment between the DC quality features and FSA requirements. Later in 2013, TPR expects to produce a final version of its analysis on how member benefits are protected in work based personal pensions. It will also agree joint working protocols with the FSA (and its successor bodies) to determine how breaches of the law should be dealt with between regulators to ensure a coherent and effective regime.

Next steps

The consultation, to which we will be responding, closes on 28 March 2013.

1 Those with between two and twelve members. TPR does not expect such schemes to be used for automatic enrolment
2 Up to £5,000 in the case of an individual and up to £50,000 in any other case, per breach of law
3 Please see our News: “TPR’s recipe for good DC provision” (October 2012)
4 Active, deferred or pensioner On 10 January 2013, TPR published a consultation on a new code of practice (the “Code”), regulatory guidance (the “Guidance”) and regulatory approach relating to the administration and governance of work based DC pension schemes