In the spotlight

Peter Davy explores the recent focus on improving DC scheme governance

New years always bring challenges for scheme governance, but DC schemes face a particularly cluttered in-tray this January.

Top of the pile, of course, is the first ever code of practice focused on DC schemes published by The Pensions Regulator in November, along with associated regulatory guidance. A template ‘comply or explain’ governance statement for that is forthcoming, and the regulator is to begin thematic reviews of DC schemes’ compliance with legislation and good practice.

Added to that, however, there is also a flurry of initiatives following the Office of Fair Trading’s review of workplace pensions, which also formally concluded in November. It identified significant weaknesses in the market and prompted a number of initiatives: The Association of British Insurers (ABI) committed to an audit of old schemes to address concerns of high charges; TPR has agreed to take rapid action to assess which smaller trust-based schemes are not delivering value for money; and the ABI has agreed its members will establish independent governance committees amid concerns about the lack of independent scrutiny of contract-based schemes.

It is, as law firm Pinsent Masons partner Matthew De Ferrars notes, something of a turnaround.

“All of the attention for years has focused on DB, while there’s been almost nothing for DC, and now that vacuum has now been filled.”

Whether it will bring lasting change is a different question.

Good tidings

De Ferrars himself is optimistic. DC trustees will have to work to stay off the regulator’s ‘hit list’, he argues, and the commitment to thematic reviews means an end to light-touch regulation of DC schemes.

The focus on DC schemes is likely to only intensify as auto-enrolment continues. In January and February 2014, 5,000 employers reach their staging dates. In the second quarter of 2014, it will be 30,000. Governance concerns are likely to reflect this changing pensions landscape.

Society of Pension Consultants president Roger Mattingly says the rise of DC issues is reflected in trustee board meeting agendas. “Increasingly now DC items are dealt with at the beginning of the meeting to ensure they get proper airtime,” says Mattingly.

Pensions Management Institute chief executive Vince Linnane agrees: “When final salary deficits are the pressing issue for trustee boards you can understand why DC is the ugly sister, but at any time between 2016 and 2020 the tipping point is going to be reached where DC assets are going to be worth more than DB.”

Indeed, even contract-based schemes – nominally outside the regulator’s control (being under the Financial Conduct Authority) – are unlikely to escape scrutiny. There are already signs of this in the moves from the ABI and DWP following the OFT review to establish independent governance committees for contract-based workplace schemes.

Limited resolution

However, a particular problem is likely to be smaller schemes. The OFT report reiterated findings of last year’s TPR survey and previous studies in identifying smaller schemes as an area of weakness, and not all are hopeful the codes of practice and other changes will filter down.

“Large and even medium-sized employers are probably going to improve but my worry is smaller employers wouldn’t know good governance if it hit them in the face,” says pensions governance consultancy Muse Advisory associate director Anne Kershaw. Unfortunately, she says, they are also most likely to baulk at the cost of advice.

As it is, the DWP has agreed to look at new enforcement powers to tackle small schemes.

“My impression is the regulator is not keen on small DC occupational schemes,” De Ferrars says. “The issue is whether smaller schemes gradually raise their game or if a regulatory push effectively eradicates them.”

If the latter, one option would be to transfer members into one of the burgeoning number of master trusts. There, again, there are plenty of examples of good practice, with signs master trust providers are beginning to compete on governance arrangements. In December, for example, Legal & General announced it is to hold an annual general meeting for members of its master trust this year, giving them a chance to voice concerns about scheme investments to the trustees and the governing body.
Worksave Mastertrust trustee Paul McBride says part of the object of the exercise is to address concerns regarding governance and to highlight the fact that an independent body runs the scheme.

Nevertheless, despite such efforts, it is an area where some feel the TPR code should have said more.

“The code fails to really address the unique issues raised by master trusts, where trustee selection processes leave a lot to be desired,” says the University of Sheffield research fellow Craig Berry. Parent companies, he maintains, retain a lot of influence on who sits on the trustee boards, calling into question their independence.

More to come

The code’s silence is probably explained by the ‘assurance framework’ developed for master trusts by accountants body ICAEW, its consultation on which closed in December. Final guidance is planned for publication in the spring.

That, though, is voluntary, and has been criticised by the Master Trust Association, partly on the basis that it will add costs for reputable providers, while doing little to tackle the less reputable, which will ignore it.

It’s a similar story with contract-based schemes, where despite good practice (probably most common among the household names) worries persist. Baker Tilly associate director Karen Tasker argues that members in contract schemes still remain the “ignored population”.

“The OFT report suggested a governance body needs to be in place but there is no legal requirement for that at the moment,” she says. The potential costs, mean many won’t rush to address it, she thinks.

Finally, there are always complaints that even for those following the code, it may become a tick box exercise, and still fails to address critical elements.

For pensions policy expert Ros Altman, for instance, the elephant in the room remains decumulation, with even trustees pushing for good governance often continuing to be satisfied with signposting members to a non-advised broker rather than full financial advice, restricting their likely options to an annuity, whether appropriate or not.

To see these effects, however, we might have to wait for another new year. While all the new auto enrolment members will have an impact, it may take time to be felt, reckons PwC partner Peter MacDonald.

“As we get into the second half of the year, and into 2015 that’s when we going to see more of a reaction. 2014 is just a little bit too early for it to come through.”

Peter Davy is a freelance journalist

Related Articles