TPR’s recipe for good DC provision

Introduction

Over the last five years, TPR has responded to the growing prominence of DC provision by publishing a number of statements, Q&A guidance notes and detailed discussion papers. In doing so, it has sought to provide a framework which can be used as a practical checklist and best practice benchmark for DC schemes. More recently, TPR has set out key principles it believes are necessary to achieve good member outcomes. We expect these six principles will form the basis of TPR’s regulatory approach to DC going forward.

In this Alert:

• Key points
• Background
• The principles
• Six elements of good DC provision
• Will your DC Scheme achieve a good member outcome?

Key points

• TPR has demonstrated its increasing focus on DC with the publication of its “six elements” and “six principles”.
• The principles concentrate on a DC scheme’s design, governance and administration, while the elements are aimed at achieving good member outcomes.

Background

In January 2011, TPR published a discussion paper to help it frame its strategic approach to DC regulation. Its paper1 identified six elements that TPR considers must be present in a DC scheme to provide members the best chance of achieving adequate income in retirement. TPR’s detailed response2, published earlier this year, confirmed that respondees were largely in agreement with TPR’s six elements of good DC provision (see below).

Slightly confusingly, in December 20113, TPR simultaneously invited the pensions industry to take part in a dialogue on six principles for good design and governance of workplace DC pension provision. TPR’s subsequent statement in June 20124 sets out the key features of each principle, which it considers will help schemes demonstrate whether they are satisfying the high level principles in practice.

The principles

TPR’s six principles of good workplace DC span the lifecycle of a DC scheme from design, to ongoing management, to facilitating appropriate decumulation decisions:

• Principle 1 – Schemes are designed to be durable, fair and deliver good outcomes for members.
• Principle 2 – A comprehensive scheme governance framework is established at set-up, with clear accountabilities and responsibilities agreed and made transparent.
• Principle 3 – Those who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them out.
• Principle 3 – Those who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them out.
• Principle 4 – Schemes benefit from effective governance and monitoring through their full lifecycle.
• Principle 5 – Schemes are well administered with timely, accurate and comprehensive processes and records.
• Principle 6 – Communication to members is designed and delivered to ensure members are able to make informed decisions about their retirement savings.

Whilst the six principles outlined above do not neatly correspond to each of the six elements of good DC provision, it is clear that TPR hopes that following the six principles it will help schemes deliver DC success!

Six elements of good DC provision

Appropriate contribution decisions

Auto-enrolment will result in millions more saving for retirement through a DC vehicle for the first time. Although the legislation now stipulates minimum contribution levels for a qualifying DC scheme, whether these are “appropriate” (in order to achieve a good member outcome) will depend on each member’s personal circumstances. TPR believes that all members should be made aware of the consequences of their long term savings patterns and should be given the opportunity to make informed decisions about their contribution levels.

Appropriate investment decisions

Following the 2008 review of the Myners’ Principles5, the Investment Governance Group (IGG) was established to spread “best practice” in investment decision making and pension fund governance. The IGG’s six investment principles6 (not to be confused with the TPR’s six principles mentioned above) include the selection of an appropriate default fund. TPR acknowledges that most people currently go into a scheme’s default fund, a trend that is set to continue given that members do not need to make an express investment choice in respect of auto-enrolment. [The DWP (in consultation with the FSA and TPR) also issued guidance in May 20117 to establish good decision making in this area.]

The key point to note from TPR’s guidance is that the range of investment options should be suitable for the profile of the membership and so the selection, design and monitoring of the default fund will be crucial.

Effective and efficient administration

Promotion of good administration is one of TPR’s statutory objectives. In a statement last year8, TPR pointed out that whilst governance functions in DB and DC contexts are similar, the steps taken to manage underlying risks will differ. Arguably, timely administration and good record keeping is even more significant in a DC context.

Protection of assets

Unlike DB, DC assets are generally considered “safe” because the members’ assets should always satisfy the corresponding liabilities. However, it is important that DC schemes understand issues such as the capital adequacy requirements that apply to a product or provider, the manner in which assets are held for safe keeping (custody) and the extent to which assets are ring fenced or co-mingled.

Value for money

Clearly, costs and fees can cut into the value of a member’s DC pension pot. DC charges are particularly topical at the moment with the NAPF currently consulting on this issue9. Any administration/investment charges which the member may incur should be both transparent and fair, although TPR notes that low costs will not automatically mean good value.

Appropriate decumulation decisions

Adequate retirement income will depend on how a member’s fund is converted into income at retirement. Building on its 2009 statement10(on the importance of improving retirement options for members and the processes to support them), TPR again stresses the importance of making members aware of the “open market option” so that they can choose the right retirement income option for their own individual circumstances.

Will your DC Scheme achieve a good member outcome?

TPR believes that too many DC schemes are providing poor value for money. The publication of the six principles and related six elements described above is part of its ongoing engagement with the pensions sector to try and improve DC provision. Whilst the principles are not binding, they do emphasise TPR’s regulatory focus on DC and provide useful guidance for Trustees seeking to improve their offering.

1 TPR Discussion paper -“Enabling good member outcomes in work based pension provision” – January 2011
2 TPR Discussion paper response – “Enabling good member outcomes in work based pension provision” – February 2012
3 TPR press release – “Six principles for good work place DC” – 6 December 2011
4 TPR statement – “Enabling a good member outcome in DC pensions” – June 2012
5 Paul Myners reported in March 2001 on Institutional Investment, recommending that pension scheme trustees voluntarily adopt a series of principles and best practice for investment decision making
6 IGG consultation paper – Investment governance of DC pension schemes – February 2010
7 DWP – Guidance for offering default option for defined contribution automatic enrolment pension schemes – May 2011
8 TPR statement – The role of trustees in DC schemes – October 2011
9 NAPF – Telling Employers about DC pension charges – May 2012
10 TPR statement “Engaged employers and informed retirement choices – key to good outcomes for members of DC pensions” – July 2009