In addition to its wider 21st Century Trusteeship project The Pensions Regulator (TPR) has outlined what it sees as further problems regarding the governance of small pension schemes. It’s announced a number of steps targeting small schemes specifically. A summary of its findings and steps it has proposed is set out below.
Small defined contribution (DC) schemes
The Pensions Regulator (TPR) has recently conducted its annual survey into defined contribution (DC) schemes. It highlighted that the trustees of just one in ten small schemes and one in three medium schemes are doing everything which TPR believes is essential to assess value for members.
Schemes are divided as follows:
- Micro schemes: 0-11 members
- Small schemes: 12-99 members
- Mediums schemes: 100-999 members
- Large schemes: 1,000 or more members.
The survey noted several systemic issues, including the fact that only 41% of scheme trustees overall are researching and taking into account what members value. It also found that the majority of chair statements for small schemes provided inadequate or incomplete explanations of how the scheme’s costs and charges represent good value for members.
Following the survey, TPR has stated that it will take the following action:
- Review its guidance to be clearer about its expectations of chair statements, including value for member assessment
- Test a more directive approach to delivering guidance as parts of its work to drive up standards of trusteeship. This will involve targeting tailored communications to certain DC trustees, setting out exactly what TPR expects and following this up with interventions that ensure that reviews are meeting expectations
- Pilot a regulatory oversight approach with a number of schemes it feels might be considered to be higher risk or are likely to have a greater impact should they fail to meet its standards – with such schemes seeing the regulator engage with them proactively and more frequently to ensure that it is satisfied their governance is of a good standard
- Continuing to take action against schemes which produce sub-standard chair’s statements. This may include a mandatory penalty of £500 - £2,000 in addition to a discretionary penalty for beaches of underlying governance requirements
- Using its ‘21st Century Trusteeship’ communications to 40,000 people who run schemes to drive up standards: the most recent theme was improving value for members.
There is no direct action that trustees are required to take as a consequence of the announcement, but all trustees should be aware of the push by TPR for improved governance and be continually reviewing their own policies, systems and governance to ensure they are meeting the required standards.
Small defined benefit (DB) schemes
New research from The Pensions Regulator (TPR) suggests that smaller defined benefit (DB) schemes are lagging behind larger schemes in performance. The research suggests that inferior governance standards from trustees are a key factor in the poor performance of smaller schemes. It also shows that smaller schemes generally score lower than larger schemes on their trustees’ adherence to the DB funding code principles.
The survey revealed a positive picture in relation to the majority of the DB funding code principles, but it also highlighted particular areas of weakness:
- A failure by some trustees to include appropriate contingency planning within their risk management frameworks
- A reluctance by some trustees to assess employer business investment plans robustly
- A significant increase in the percentage of trustees reporting that they take no actions to ensure their scheme is treated fairly among competing demands on the employer
- That fewer than half of the trustees of small schemes had a documented process to assess the fitness and propriety of new trustees
- That a third of all trustee boards had no documented conflicts policy and no register of interests
To address the issues highlighted in the latest DB research and response, TPR is continuing its action to drive good governance in all schemes, regardless of size. TPR will be stepping up its proactive involvement with smaller schemes to assess their performance in key risk areas, including governance, covenant, investment and funding. It will be providing clear directive feedback to the trustees of a number of small schemes and those which do not act on the feedback may face further action.
To set clearer expectations for DB trustees, TPR has also started work on a new DB funding code, as outlined earlier this year in the Government’s DB pensions White Paper. The code will aim to introduce clearer funding standards to help trustees and employers to agree good funding outcomes for their schemes and which should, alongside any expansion of TPR’s powers, better equip it to take enforcement action. Alongside the new funding code, TPR will be introducing a more explicit “comply or explain” regime. This will require trustees and employers to demonstrate the effectiveness of their funding, investment and risk management.
There is no regulatory requirement for trustees to take any action as a result of this report but trustees, and particularly trustees of small DB schemes, should be aware of the increased focus by TPR on better governance and standards across all pension schemes and be taking continual action to ensure they are meeting the expected standards.
Published: October 2018
Pensions Law Update - October 2018
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