Defined contribution schemes were hit with a slew of regulation last week across contract-based and trust-based provision, as the government and the City watchdog attempt to unify standards in these two areas.
New rules on independent governance committees, the charge cap for auto-enrolment default funds and tighter governance requirements for trust-based schemes will test the limits of pensions professionals to push through compliance by April.
Ian McQuade, client director at governance specialists Muse Advisory, said the new regulations have added to the “perfect storm” looming ahead of the changes.
“With all of the changes that are coming, there will be some organisations that are ready, some who will muddle through and some who will really struggle,” said McQuade.
“I’m aware of some schemes who are having difficulty and are struggling to get confirmation from providers that everything will be in place and the charge cap will be complied with,” he added.
The Office of Fair Trading's damning 2013 report into the DC workplace pension market highlighted several shortcomings in the sector, including high charges and a misalignment of interests between members and employers.
This fed into the Department for Work and Pensions’ wider consultation, which looked to cap charges for auto-enrolment default funds at 0.75 per cent and improve governance standards for such schemes.
Last week’s government response set out rules for pension schemes to provide an annual chair’s statement – and IGCs an annual report – detailing how they are securing value for their scheme members.
In addition, the Financial Conduct Authority issued its final ruling on IGCs for contract-based schemes.
The committees will be required to have a minimum of five members and will be charged with assessing whether schemes are achieving good value for their members.
When the member, the ordinary man on the street, sees a report from trustees with a key statement of how well the scheme is complying with the minimum governance standards, it makes things that much more transparent
Arron Slocombe, Baker McKenzie
IGCs will need to place members’ interests at the heart of scheme decisions. Richard Butcher, managing director at professional trustee company PTL, said if the industry was going to cooperate on the wider principle of value for money, there needed to be a common definition of what constitutes a good outcome.
“Otherwise you have the IGC defining it one way and FCA defining another way. That could place one or the other insurer at an advantage or disadvantage,” he said.
The watchdog had considered whether to make it a requirement that at least one member of the IGC was an ‘approved person’, but has since decided against because it does not want to deter potential candidates.
John Lawson, head of corporate benefits policy at insurer Aviva, said: “The reason I don’t think they need to be approved persons in IGCs is because they don’t have a role in managing regulated business.
“Their role is to make recommendations to people who are approved, ie [the] management of insurance companies, so they do not need to be regulated persons.”
Trust-based governance
In addition to the governance overhaul for contract-based pension schemes, the DWP laid out regulations on governance standards and charges centring on trust-based schemes.
Responding to the new rules, Arron Slocombe, partner at law firm Baker McKenzie, said he thought the requirement for trustees to produce an annual comply-or-explain statement will be a new demand for trustees across the industry.
He added: “When the member, the ordinary man on the street, sees a report from trustees with a key statement of how well the scheme is complying with the minimum governance standards, it makes things that much more transparent.
“I wouldn’t be surprised if this statement is the first building block towards greater transparency over the years around governance and charging.”
Margaret Snowdon, chair of the Pensions Administration Standards Association and director at JLT Employee Benefits, said she thought having a minimum number of trustees on mastertrust boards would ensure there was opportunity for discussion and debate.
“That adds a cost... but the trade-off is better decision-making because it’s shared,” she said.
The original government consultation suggested a minimum of three trustees, but expected larger mastertrusts to have five, mimicking IGCs.
