Heineken targets quicker changes with contract scheme

Janis Ireland, pensions governance and operations manager at Heineken, said the company chose to go down the contract-based DC route to make switching investment managers easier – while having a governance committee in place that mimics a trust-based structure.

"It gives a bit more flexibility," Ireland said. "Within the terms of reference, the governance committee has implied consent to change the managers."

Employers that are able to make changes to their scheme's fund options without seeking members' consent can quickly deal with the risk of manager underperformance.

But there are limitations to contract-based schemes, such as the member's legal basis to challenge scheme decisions and inflexibility around scheme communications.

The National Association of Pension Funds has also warned of a lack of independent oversight of pension schemes if trust-based arranagements are replaced by contract-based.

Heineken's investment governance

The 2,200-member scheme has a full governance committee with member-nominated, customer-appointed and independent members.

The committee wants to keep reassuring members but also continuing to show it is monitoring the risk

Janis Ireland, Heineken

Ireland told the 2012 NAPF conference: "The committee has its own terms of reference that sets out exactly who is accountable, where the power still rests with the employer, where they sit with the committee and if there is any dispute how that is dealt with."

The committee is responsible for monitoring the performance of the funds and meets quarterly. Because the scheme has not yet reached the end of its first year, there are not any investment data to act on.

Heineken closed its defined benefit scheme to future accrual in July 2011, so had to introduce a DC section for a set of employees who had only known DB pensions.

Ireland said: "For a lot of members, DC is alien to them and they just see a pot of money going in and they cannot see necessarily tangible figures until they get their first annual statement – which looks a lot different to anything they have had before.

"The committee wants to keep reassuring members but also continuing to show they are monitoring the risk."

But the scheme has difficulty in other areas such as communication, where being a contract-based scheme is more limiting.

The scheme provides modeller tools and communication. But it has only been running for a year, so members are at the accumulation end where written communication is important.

Ireland said: "We are stuck with FSA regulations, which means it is very difficult to change the communication from the provider.

"If we do not like the communication they are providing – and we think there is a lot of jargon – we do feel that we have to jump through hoops to get our jargon-free letter."

Managing member discontent

Those sitting on a contract-based scheme's governance committee do not have the same legal duty to their members as is available to members of trust-based schemes.

If the committee does not follow what it is meant to do, what is the comeback for a member?

Dominic Delaforce, Aberdeen

Dominic Delaforce, head of UK pension funds at Aberdeen Asset Management, welcomed a governance committee as a "great thing" but questioned the recourse for members unhappy with its decision.

The asset manager offers its employees a contract-based DC scheme with a governance committee – a scheme that has been awarded the Pension Quality Mark Plus in recognition of its relatively high contribution levels.

But Delaforce asked delegates: "If the committee does not follow what it is meant to do, what is the comeback for a member?"

Darran Burton, head of DC regulation at the Pensions Regulator, said the members might be able to pressure the committee to change track if they are unhappy.

He added: "We encourage it and we think governance committees can play an important role but it is voluntary."

The regulator is currently considering a range of options to ensure compliance with its six principles for good DC provision, with a new code of practice and best-practice guidance to be released in December.

This could see 50 pension schemes selected at random to find out whether they are putting these principles into practice.

Burton added: "Maybe we will do a thematic review type of approach where we just pick out 50 schemes at a time and go and test [whether they are complying]."