Trustees of defined contribution (DC) schemes face particular pressures, not least because of The Pension Regulator’s (TPR) close focus on chairs’ statements. But if you’re a DC trustee aiming at good governance, what pointers can you draw about future best practice? How should DC trustees be looking to improve into the 2020s?
Lessons can be learned from the authorisation process for DC master trusts. In some ways that process is unique to master trusts given their multi-employer nature. But master trusts will effectively form the bar against which single employer DC schemes should measure their governance, particularly for large or well-established schemes which are aiming for high standards.
So it’s useful to look for a read across. See below for some examples – not comprehensive, but a strong starting point.
Single employer DC schemes: lessons from master trust authorisation
1/ TPR isn’t afraid to enforce rules and stick to them. In DC trusteeship there is more scope for TPR to create rigid expectations than in defined benefit (DB), where areas such as funding level and covenant vary between schemes. We have seen this happen with DC chairs’ statements and aspects of master trust authorisation. It could follow in other areas, such as TPR’s review of default funds. Action: make sure you stay up-to-date on TPR’s latest thinking, including any messages that TPR gives out behind the scenes.
2/ Trustee independence is important. This is a central theme of master trust authorisation: TPR wants trustees to be empowered to make their own decisions. This prompts questions for single employer schemes too, e.g. the sometimes difficult question of how much power trustees have to determine their scheme’s communications policy. Action: consider whether you are content with your independence and the level of decision-making power you hold.
3/ DC knowledge and understanding needs special attention. The master trust authorisation process has a strong emphasis on trustees demonstrating the right mix of skills and experience. For single employer DC schemes or sections this can’t be taken for granted – many schemes have found this one of the hardest areas of the chair’s statement to complete. Action: consider compiling a skills matrix in a similar format to those used by master trusts.
4/ Schemes should think about insolvency risk. A key focus of master trust authorisation is the risk of the provider becoming insolvent. Master trusts now have ring-fenced reserves to cover winding-up costs. Arguably this leaves a mismatch against single employer schemes which lack the same requirement. Time will tell whether The Department for Work and Pensions (DWP) explores a similar rule for all schemes. Action: discuss whether to ask your employer to create a reserve voluntarily – some schemes might look at this even if they are in a minority.
5/ Test your administrators. A vital area for all DC schemes, adopting a central role in master trust authorisation. Large single employer schemes might look at borrowing some of the headings from the first part of the master trust systems and processes questionnaire. Action: look at the questions you ask your DC administrators as part of their regular reviews, and assess these carefully.
Partner – Pinsent Masons