Monday was a landmark day in the provision of defined contribution (DC) pensions. In the past we have blogged extensively about the flexibilities which will be available to pension schemes and their members and, in our last post we discussed the new charge cap. Today we discuss the governance of DC schemes and the minimum quality standards which apply as of 6 April 2015.
One factor which makes these changes of much wider importance than some others is that they are relevant to all employers who provide DC pensions for their staff, not just for those who do so through a trust based scheme. We start by setting out the background to the new quality standards and then move on to discuss how these are to be implemented for both trust-based and contract-based schemes.
Purpose of quality standards
Automatic enrolment of eligible jobholders into workplace pension schemes means that a growing population of people are becoming active members of those schemes. As a result, both Government and regulatory authorities have turned their attention to improving the governance of DC pension schemes to ensure that they provide appropriate protection and good value for their members. As the Pensions Regulator (the Regulator) has pointed out, the risk in a DC scheme lies with the member rather than his employer so “it is vital that those running the scheme ensure it is effectively governed, durable and offers value for money”.
The Department for Work and Pensions (DWP) has worked with both the Regulator (which has responsibility for regulating DC occupational pension schemes) and the Financial Conduct Authority (FCA) (which has responsibility for regulating workplace personal pension schemes) to put in place a framework which gives some reassurance that minimum standards of governance are being met.
Trust-based occupational pension schemes
The Government has made regulations  which bring in new governance requirements on almost all occupational pension schemes which provide DC benefits which came into force on Monday.
The key requirement which trustees and managers will need to be aware of with immediate effect is that they are under a duty to appoint a chair of trustees (or managers if applicable) within three months of the scheme being established (or by 5 July 2015 if the scheme was established before 6 April 2015) and to then appoint a replacement within three months of the chair ceasing to act.
The chair will be responsible for making a statement within seven months of the end of each scheme year which covers:
- information on the scheme’s default investment strategy and any review carried out or changes implemented during the year;
- a description of how the scheme meets requirements for processing core financial transactions – these are transactions including (but not limited to) the investment of contributions to the scheme, the transfer of assets relating to members and payments in respect of members;
- information on the charges and transaction costs applicable to the default investment funds and the extent to which, in the trustees’ assessment, those charges and costs represent good value for members; and
- how the trustees meet the requirements for trustee knowledge and understanding and how this enables them properly to exercise their functions as trustees.
Any trustees or employers who are unsure about the governance requirements which will apply to their schemes with effect from 6 April 2015 may wish to seek advice to ensure that they satisfy their new obligations.
Contract-based personal pension schemes
The FCA has introduced new rules for contract based pension schemes which will also take effect from 6 April 2015.
The key provision here is that the providers of workplace personal pension schemes must set up and maintain independent governance committees (IGCs). Providers must include certain minimum requirements in their terms of reference for IGCs. Each IGC must:
- act solely in the interests of policyholders;
- assess the ongoing value for money for policyholders delivered by the scheme – this is measured in much the same way as for trust-based schemes with the focus on default investment strategies and the processing of core financial transactions;
- raise any concerns it has in relation to value for money with the provider’s governing body;
- escalate concerns as appropriate;
- make decisions using at least three members, with the majority being independent; and
- have a chair who is responsible for producing an annual report.
The FCA expects these changes to bring about better experiences for members of workplace personal pension schemes.
It may take some time to establish the impact that these new requirements have on the value for money provided to members of DC pension schemes but both the Regulator and the FCA will be paying close attention to developments over the next few months and we can expect to hear more on the subject later in the year.
 The Occupational Pension Schemes (Charges and Governance) Regulations 2015