Draft Regulatory approach
Ensuring good
governance and
administration in
work-based defined
contribution pension
schemes
January 2013
Contents
Introduction3
The case for a new DC regulatory approach
4
Aims and objectives5
Better regulation6
Effectively governed, well administered and durable schemes
7
Educating trustees14
Enabling the market to deliver good member outcomes
14
Our enforcement approach15
Targeting risks in the DC market segment
18
Measuring success22
Publishing our enforcement activities23
Appendix: our six principles24
2
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
1.Introduction
1.1. The Pensions Regulator (the ‘regulator’) was established under the
Pensions Act 2004 as an executive non-departmental public body,
sponsored by the Secretary of State for Work and Pensions, to regulate
work-based pensions.
1.2. This document sets out how we will regulate defined contribution (DC)
schemes. It reflects our statutory objectives which include:
• protecting the benefits of members of work-based pension schemes
• promoting and improving understanding of the good administration
of work-based pension schemes.
1.3. It builds on our regulatory strategy Delivering successful automatic
enrolment1 which we published in February 2012 and outlines our remit
in relation to the regulation of all pension schemes, as illustrated below.
Occupational
defined benefit (DB)
trust-based pension schemes
Occupational defined
contribution (DC) trustbased pension schemes
Work-based
personal pensions
Occupational
Individual
personal pensions
Personal
Employer-sponsored
Non-sponsored
The Pensions Regulator’s remit (work-based pension schemes)
FSA remit
1.4. The regulator is responsible for protecting the outcomes of members
in those pension schemes that fall into the first three columns. This
includes occupational DC trust-based pension schemes and workbased personal pensions (commonly referred to as contract-based
schemes). In the case of work-based personal pensions, the provider
is also subject to prudential and conduct regulation by the Financial
Services Authority (FSA).
1.5. Our regulatory framework draws on three important themes:
• Support the market in helping to deliver good outcomes for
members of DC schemes and quality provision for automatic
enrolment
• Deliver a robust and proportionate regulatory framework that focuses
on key risks in DC schemes and supports regulatory intervention
where there is inadequate attention paid to these risks
• Intervene and enforce only where the market appears unable to
deliver good member outcomes unaided.
1
Available at: www.thepensionsregulator.
gov.uk/docs/delivering-successful-
automatic-enrolment.pdf
3
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
1.6. The framework reflects the fact that we are the sole regulator for
occupational trust-based pension schemes and while we have an
interest in work-based personal pensions, these providers are regulated
by the FSA. We set out in this document our proposed approach to
regulating occupational DC trust-based pension schemes. We also
describe how we are working with the FSA to ensure that the regulation
of work-based personal pensions delivers comparable outcomes.
1.7. The starting point to delivering a robust regulatory approach for DC is
education and enablement as a means of securing behavioural change.
We want to ensure that trustees have appropriate levels of knowledge
and understanding to be able to run their schemes competently. We
want to provide the right tools that enable the pensions market to
operate effectively and demonstrate quality standards in DC schemes.
1.8. This document also outlines the powers we have, the approach we
expect to take to monitor levels of compliance and how we will focus
regulatory intervention and enforcement action if we believe that there
has been a breach of law that is materially significant. As a risk-based
regulator we will focus our resources on addressing those risks that pose
the greatest threat to the achievement of our statutory objectives.
2.The case for a new DC
regulatory approach
2.1. We last consulted on our regulatory approach for defined contribution
(DC) schemes, How The Pensions Regulator will regulate defined
contribution schemes in relation to risks to members2, in 2007. Since
then there have been significant shifts in the pensions landscape,
with the growing prominence of DC provision, continued increases
in longevity and major reforms to pensions. As a result of the
Government’s automatic enrolment regime it is expected that between
5 and 8 million people will start saving, or saving more, in all forms of
workplace pension scheme.
2.2. DC schemes will be at the forefront of efforts to give people the
retirement income they expect. To maximise the benefits of automatic
enrolment it is important that members have confidence that they are
saving into safe and durable products that are capable of delivering
good outcomes. Employer confidence in pension provision is also
crucial to the longer term success of pensions reform.
2.3. The changing DC environment places an increased emphasis on
the strength of governance and stewardship, particularly around the
design of investment options, investment management and scheme
administration, and the need for better standards in DC.
2.4. This changing context for DC has been recognised in the government’s
recent document Reinvigorating workplace pensions3, and industry
initiatives such as the joint industry code of conduct on Making pension
charges clearer4.
4
2
3
4
Available at www.tpr.gov.uk/docs/
dc-scheme-reg-con-report-2007.pdf
Available at www.dwp.gov.uk/
docs/reinvigorating-workplacepensions.pdf
Available at www.napf.
co.uk/PolicyandResearch/
DocumentLibrary/~/media/Policy/
Documents/0205_Making_pension_
charges_clearer.ashx
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
2.5. We recognise that schemes may need assistance in meeting these
challenges and we will continue to educate and enable trustees to fulfil
their accountabilities to scheme members, for example by providing
codes of practice, guidance and e-learning resources.
2.6. Our analysis of the DC market has concluded that the risks of pension
schemes vary depending on the nature of the pensions product, for
example whether it is an occupational DC trust-based pension scheme
or work-based personal pension, its structure and its size. Our DC
regulatory approach identifies the key risks in different DC market
segments and outlines how we expect trustees to tackle them.
2.7. So as the dynamics of the DC landscape change as a result of automatic
enrolment, we are refining our regulatory approach to DC to ensure it
remains fit for purpose.
3.Aims and objectives
3.1. The strategic aim of this DC regulatory approach is to support the DC
market in delivering good outcomes for members. Members should be
placed in quality products that are effectively governed, durable and
offer value for money. Work-based DC pension schemes should be
governed in members’ best interests, with competent and unconflicted
people overseeing the key decisions and functions that determine good
outcomes for members.
3.2 We have laid out our view of these key decisions and functions in our
six DC principles and our DC regulatory approach has been developed
with these in mind (see appendix).
3.3. This DC regulatory approach describes how the regulator will educate,
enable and enforce against DC schemes in order to minimise risk to
those statutory objectives that relate to DC members. It also sets out
our commitment to our regulated community and how they can expect
us to apply our regulatory approach.
3.4. The objectives of this regulatory approach are to:
• explain the way we will deliver against our responsibilities to be
proportionate, accountable, consistent, targeted and transparent
• explain how we will encourage the establishment and use of
effectively governed, well administered and durable schemes that
meet the standards set in our regulatory framework
• set out how we will educate and enable those responsible for running
schemes to fulfil their legal duties, and develop systems and behaviours
that embed the standards defined by our regulatory framework
• outline our enforcement approach when we address situations where
the standards defined in our regulatory framework are not present
and legal requirements are not being met
• outline how we expect schemes in different segments of the DC
market to demonstrate presence of the standards to regulators and
those selecting products, eg employers.
5
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
4.Better regulation
4.1. We will act in accordance with the requirements set out in the
Legislative and Regulatory Reform Act 2006 and the Regulators’
compliance code: Statutory code of practice for regulators, and will
apply the five principles of better regulation in our operational work:
• Proportionate
We will relate enforcement action to the seriousness of the breach
and take into account actual or potential harm. We will aim to achieve
regulatory outcomes with minimum burden on business
• Accountable
We will be accountable for our actions and have policies and
standards in place against which we can be held to account
• Consistent
We will take a similar approach in similar circumstances to achieve
similar ends
• Targeted
We will focus our regulatory activities primarily on those whose
activities and behaviours give rise to the most serious risks
• Transparent
We will help our regulated DC community understand what is
expected of them and what they should expect from us.
6
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
5.Effectively governed,
well administered and
durable schemes
5.1. Our regulatory framework for DC is built on the belief that all workbased DC pension schemes should be designed and managed to
deliver good member outcomes. This includes work-based personal
pensions (contract-based schemes).
5.2. The regulatory approach, developed over the past two years and
illustrated below, is framed around DC quality features which
encapsulate those activities, behaviours and control processes that are
more likely to deliver good member outcomes.
Supporting and
collaborating with
stakeholders
Key activities
Review risks in
the DC market
and set priorities
Sets tone for
industry
marketing policy
dialogue and
prompt industry
self-regulating
initiatives
Build regulatory
requirements
into our
communications
and industry
quality mark(s)
Support
development of
industry best
practice, use
existing tools
Joined up
regulation with
FCA and PRA
Set high level
requirements
and focus areas
Provide a basis for
all schemes to
assess compliance
Provide information
to enable trustees
and scheme
managers
and support
enforcement
Monitor schemes
Trust
Content
Developing our DC
strategy in response
to changes in the
DC landscape
DC principles
Audit and assurance
framework to
demonstrate
consistency with
the DC code and
guidance
‘Enabling good
member outcomes
in work-based
pension provision’,
Jan 2011
‘Delivering successful
automatic enrolment’,
Feb 2012
Code of practice
Guidance
Education and
enablement tools
Contract
DC quality features
Comply or explain to
disclose consistency
with the DC code
and guidance
Casework: thematic
and targeted reviews
Mapping of
DC principles
to FSA regime
Joint
thematic
reviews
FCA and PRA
casework reviews
Overall DC regulatory approach
2011/12
7
June 2012
2013
January 2013
Summer 2013
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
5.3. For occupational DC trust-based pension schemes, we have defined
and provided guidance on the DC quality features in Code of
practice 13: Governance and administration of occupational defined
contribution trust-based pension schemes (the DC code) and the
accompanying DC regulatory guidance. The features within the DC
code are connected to legal requirements which we may seek to
enforce where appropriate.
5.4. We published a complete list of draft DC quality features in June 2012.
Since publishing these, we have refined them in a number of ways.
Table 1 below contains a complete list of the new DC quality features,
an explanation of the changes and where each feature is addressed in
the DC code and DC guidance.
5.5. Schemes that can demonstrate the DC quality features are more likely
to meet the standards of governance and administration that we
expect. We will consider schemes’ consistency with the DC code as a
risk indicator when assessing compliance with pensions legislation, and
will take other material risk indicators into account.
5.6. We explain in section 7 below how we will look to schemes to assess
consistency with the DC code and DC regulatory guidance, including a
comply or explain regime and a framework for independent assurance.
5.7. While both the DC code and DC regulatory guidance have been
developed predominantly with trustees in mind, managers of workbased personal pensions may also find these resources useful.
5.8. The DC quality features are relevant for work-based personal pensions.
Our analysis suggests that FSA rules and guidance, which require
providers to maintain robust standards of governance and compliance,
are in many ways parallel to the regulatory framework that applies to
occupational DC trust-based pension schemes. We will continue to
work closely with the FSA to address any features that are not already
covered by the FSA’s existing provisions.
5.9. Our quality DC features have been mapped against the FSA’s
regulatory requirements and we are working closely with the FSA to
develop this further.
5.10.We will also work with the FSA and its successor bodies, the Financial
Conduct Authority (FCA) and Prudential Regulation Authority (PRA),
to set out how we will work together in areas of regulation where we
have a dual role. This may involve the development of a formal process
to determine how breaches of the law can be dealt with between
regulators to ensure we have a coherent and effective regime.
8
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
Table 1: Summary of the DC quality features
DC quality feature
Details of change
Location
Principle 1: Essential characteristics
Schemes are designed to be durable, fair and deliver good outcomes for members
All members receive value for money.
Reference to ‘treating impartially’ has been
removed as this is addressed under Principle
3. Reference to ‘beneficiaries’ has been
replaced with ‘members’ for consistency.
DC guidance
All costs and charges borne by members are
transparent and communicated clearly at
point of selection to the employer to enable
value for money comparisons to be made
and to assess the fairness to members of the
costs and charges.
Consistency amendment with addition of
‘costs’ towards end of sentence.
DC guidance
Those running schemes understand and put
arrangements in place to mitigate the
impact to members of business and/or
commercial risks.
DC code
Those running schemes seek to
predominantly invest scheme assets with
entities regulated by the Financial Services
Authority (FSA) or similar regulatory
authorities. Where unregulated investment
options are offered, it must be demonstrable
why it was appropriate to offer those
investment options.
DC code
Those running schemes understand the levels
of financial protection available to members
and carefully consider situations where
compensation is not available.
DC code
Schemes offer flexible contribution
structures to members and/or employers
(over and above minimum scheme
qualifying thresholds).
Replaced ‘products’ with ‘schemes’ to make
clear where responsibility lies.
DC guidance
A default strategy is provided which is
suitable for the needs of members.
Addresses the need for all schemes to
make available a default strategy as part
of their investment strategy, but moved
emphasis in the feature of DWP guidelines
to practical guidance.
DC code
9
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
DC quality feature
Details of change
Location
The number and risk profile of investment
options offered reflects the needs of the
membership.
Drafting of this DC quality feature was
improved and the scope was changed to
reflect the broader needs of members and not
only their financial literacy. Practical guidance
in the DC code considers the different range
of investment options that could be offered to
different membership groups.
DC code
Investment objectives for each investment
option are identified and documented in
order for them to be regularly monitored.
DC code
A process is provided which helps members
to optimise their income at retirement.
DC guidance
Principle 2: Establishing governance
A comprehensive scheme governance framework is established at set-up, with clear accountabilities and
responsibilities agreed and made transparent
Sufficient time and resources are identified
and made available for maintaining the
ongoing governance of the scheme.
DC code
Those running schemes support employers
in understanding their responsibility for
providing accurate information, on a
timely basis, to scheme advisers and
service providers.
DC code
Accountability and delegated responsibilities
for all elements of running the scheme are
identified, documented and understood by
those involved.
DC code
Those running schemes establish and
maintain procedures and controls to ensure
the effectiveness and performance of the
services offered by scheme advisers and
service providers.
The features addressing ‘establish procedures
and controls’ and ‘maintain procedures and
controls’ have been amalgamated as they
relate to the same activities.
DC code
Those running schemes establish and
maintain adequate internal controls which
mitigate significant operational, financial,
regulatory and compliance risks.
The features addressing ’establish adequate
internal controls’ and ‘maintain adequate
internal controls’ have been amalgamated as
they relate to the same activities.
DC code
Arrangements are established to
review the ongoing appropriateness of
investment options.
10
DC code
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
Section reminder header
DC quality feature
Details of change
Location
Principle 3: People
Those who are accountable for scheme decisions and activity understand their duties and are fit and proper
to carry them out
Those running schemes understand their
duties and are fit and proper to carry them out.
DC code
Those running schemes act in the best
interests of all beneficiaries.
DC code
Those running schemes are able to effectively
demonstrate how they manage conflicts
of interest.
DC code
Principle 4: Ongoing governance and monitoring
Schemes benefit from effective governance and monitoring through their full lifecycle
Those running schemes are open and honest
with their regulators and regulatory guidance
is addressed in a timely and effective manner.
This DC quality feature has been removed
as it was considered too ambiguous and its
spirit is already embedded within the scope
of the DC code and guidance.
Those running schemes regularly review their
skills and competencies to demonstrate they
understand their duties and are fit and proper
to carry them out.
N/A
DC code
Sufficient time and resources are made
available for monitoring and reviewing
schemes to ensure that they continue to
meet good practice and continue to include
the essential characteristics established
under Principle 1.
This DC quality feature has been removed.
It was included as it related to the need
for monitoring those essential features in
Principle 1 as part of the ongoing governance
requirements. The DC code includes practical
guidelines that relate to this feature, and
have linked this to the first feature in Principle
2 above.
N/A
Those running schemes establish and
maintain procedures and controls to ensure
the effectiveness and performance of the
services offered by scheme advisers and
service providers.
The features addressing ‘establish procedures
and controls’ and ‘maintain procedures and
controls’ have been amalgamated as they
relate to the same activity.
DC code
Those running schemes establish and
maintain adequate internal controls which
mitigate significant operational, financial,
regulatory and compliance risks.
The features addressing ’establish adequate
internal controls’ and ‘maintain adequate
internal controls’ have been amalgamated as
they relate to the same activities.
DC code
11
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
DC quality feature
Details of change
Location
Those running schemes take appropriate
steps to pursue and resolve all late and
inaccurate payments of contributions.
DC code
Those running schemes monitor the ongoing
suitability of the default strategy.
DC code
The performance of each investment option,
including the default, is regularly assessed
against stated investment objectives.
DC code
Principle 5: Administration
Schemes are well-administered with timely, accurate and comprehensive processes and records
Member data across all membership
categories is complete and accurate and is
subject to regular data evaluation.
DC code
Core scheme financial transactions are
processed promptly and accurately.
The scope of this DC quality feature has been
narrowed as the reference to ‘all scheme
transactions’ was too wide. We have also
refined this feature so that it only relates
to financial transactions as data-related
processing is addressed in the feature above.
DC code
Administrators maintain and make available
their complaints process.
This DC quality feature has been removed
on the basis that Principle 2 includes a
DC quality feature on accountabilities and
delegated responsibilities which would need
to address management of complaints but
not simply in relation to administration.
N/A
Administration systems are able to cope
with scale and are underpinned by adequate
business and disaster recovery arrangements.
12
DC code
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
DC quality feature
Details of change
Location
Principle 6: Communications to members
Communication to members is designed and delivered to ensure members are able to make informed
decisions about their retirement savings
All costs and charges borne by members are
disclosed to members.
The reference to ‘annually’ has been removed
as it is important that costs and charges
are disclosed on joining and other events
described in the guidance.
Members are regularly informed that their
level of contributions is a key factor in
determining the overall size of their
pension fund.
Scheme communication is accurate, clear,
understandable and engaging and addresses
the needs of members from joining to
retirement.
DC guidance
DC guidance
Drafting of this feature has been improved.
DC guidance
Members are regularly informed of the
importance of reviewing the suitability of
their investment choices.
DC guidance
Those running schemes clearly communicate
to members the options available at
retirement in a way which supports them in
choosing the option most appropriate to
their circumstances.
DC guidance
13
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
6.Educating trustees
6.1. We expect all trustees to be able to undertake their role competently
and will continue to support trustees of all occupational DC trustbased pension schemes and help drive up standards of governance
and administration. We believe that compliance with the law and good
practice should preferably be achieved through guidance and support
materials including codes of practice.
6.2. Education is therefore at the heart of our regulatory approach. We
hope to achieve our objectives by establishing a pro-compliance
culture through:
• Publishing our DC code which sets the standards and provides
guidance for trustees required to fulfil obligations under the pensions
legislation in the context of the DC quality features
• Publishing our DC regulatory guidance that provides information,
education and assistance to trustees on good practice standards of
governance and behaviours not covered in the DC code
• Updating and improving our existing regulatory resources, in
particular our online Trustee toolkit5
• Encouraging the use of our educational tools, including the
Trustee toolkit. We strongly recommend all trustees complete the
Trustee toolkit and achieve the certificate of completion which acts
as a record of meeting the appropriate level of knowledge and
understanding required under the Pensions Act 2004.
7.Enabling the market
to deliver good
member outcomes
7.1. Members and employers should be confident that those responsible
for running pension schemes are embracing standards and behaviours
derived from the DC quality features.
7.2. Trustees of occupational DC trust-based pension schemes must
be confident that controls in place to manage governance and
administration functions are fit for purpose. Trustees must ensure
that their scheme approach for managing risks is regularly reviewed
and updated.
7.3. As part of this process, trustees should assess the extent to which their
practices are consistent with standards and guidance provided in the
DC code and DC regulatory guidance. Both documents are important
tools which enable trustees to determine whether those standards
and behaviours associated with quality DC provision are present in
their scheme.
14
5
Available at www.trusteetoolkit.com
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
7.4. We will work with key stakeholders to help develop and refine tools to
ensure that the market can respond to the challenges presented in our
regulatory approach.
7.5. Our automatic enrolment communications to employers will assist them
to select quality schemes. Our Selecting a good automatic enrolment
scheme guide6, published in June 2012, sets out ten questions which
employers can put to their provider. We believe that this document
will also assist trustees of existing schemes and providers to satisfy
employer demands.
7.6. We expect trustees to voluntarily disclose information that will enable
them to demonstrate consistency with the DC quality features. For
example, trustees would be expected to disclose why they are
satisfied that the DC quality features are present in their scheme.
Trustees will also be expected to disclose potential inconsistencies
between their DC scheme and the DC quality features under the DC
code and DC regulatory guidance. 7.7. Robust disclosure around the features will help facilitate trustee
discussions that will enable them to demonstrate that they have
considered the implications of the DC quality features and presence in
their scheme.
7.8. As well as helping trustees to validate the presence of DC quality
features, we believe it would be helpful for smaller employers if there
were a quality ‘flag’ that allows them to choose pension schemes
with confidence.
7.9. An assurance scheme, denoting compliance with our principles and
features, would provide a mechanism to help the market work better.
We will continue to work with the audit profession and others to
develop an approach that supports this proposition. This assurance
scheme could operate on a stand-alone basis but could also, in
due course, form part of a wider quality mark scheme if industry or
government choose to go down that route.
8.Our enforcement approach
8.1. Our enforcement approach consists of three activities:
• monitoring: gathering information to help us identify and monitor
risks of non-compliance with legal requirements
• investigating: assessing whether what we find is a potential
breach of the law and requires further action
• putting things right: measures we can use to resolve
problems we have identified.
6
15
Available at www.tpr.gov.uk/
docs/selecting-a-good-automaticenrolment-scheme.pdf
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
8.2.Monitoring
8.2.1. Ongoing assessment of different forms of DC provision will be a
key component of our regulatory approach. We will proactively
monitor the extent to which quality standards are present in DC
schemes. We expect all schemes to be able to demonstrate their
presence or explain how what they are doing is equally compliant
with the law.
8.2.2. Thematic and targeted scheme governance reviews will
enable us to address particularly broad issues or risks through
proactive engagement with trustees and providers. This will
enable us to have a proportionate and targeted way to address
risks through a narrow but relatively intrusive approach with
a sample of schemes. These reviews will enable us to identify
good and bad practice and may lead to enforcement action and/
or publication of the findings. They signal a new approach to
exploring areas of potential risk and will require appropriate cooperation from schemes.
8.2.3. The diagram below shows how monitoring will form part of our
regulatory approach for DC.
Regulatory casework:
enabling, enforcing
Cases
Intelligence-based
risk assessments
Themes
Intelligence reports
Whistleblowing
Liaison with other regulators
Regulatory reviews
(Notifiable events)
Awareness
Standards
Education:
standards and guidance
(activities, behaviours
and control processes)
Proactive thematic and targeted scheme governance reviews
8.2.4. We will proactively monitor DC schemes in a variety of other
ways. These include:
• asking trustees and providers for evidence of whether their
practices are consistent with our codes and guidance
• analysing information collected from a variety of sources to
detect poor behaviours and assessing new products
• establishing partnerships with other regulators and
enforcement bodies to strengthen our intelligence gathering,
while minimising the burden on DC schemes that we regulate.
16
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
8.2.5. We will also use existing channels for gathering information to
help inform our knowledge of market activities and behaviours,
and apply risk filters to determine what further action is needed.
This includes gathering information from:
• whistleblowing and other regulatory reporting
• other agencies and intelligence sources
• market research and analysis, for example
assessing emerging market risks.
8.2.6. Where we find evidence that indicates a potential breach of
legislation outside of our remit we may pass this on to the
appropriate organisation. For example, if we find evidence of
potential non-compliance with the FSA regime, we may refer this
to the FSA and its successor bodies.
8.3.Investigating
8.3.1. When our monitoring activities identify evidence that a scheme
may have failed to meet the standards defined in the DC code
and DC guidance, we will assess this evidence to determine
whether to investigate the scheme. Inconsistency with the DC
code is a good indicator that we may decide to investigate.
8.3.2. We will assess whether there has been a breach of the law and
determine whether further action is required.
8.4. Putting things right
8.4.1. Where we see poor standards and behaviours we believe pose
a risk to member outcomes, resulting from non-compliance with
pension legislation, there are a variety of enforcement options
that we may use. These include:
• informal action such as a warning letter
• formal requests for information
• inspection powers
• appointment of skilled persons
• issuing statutory notices such as an improvement
or third party notice
• publishing reports about cases where we have considered
using our powers
• issuing civil penalties of up to £5,000 in the case of an individual
and up to £50,000 in any other case per breach of law
• appointing trustees
• prohibiting a person from being a trustee
• applying to a court to restrain misuse and misappropriation
of assets.
17
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
8.4.2. The DC code will be a core reference document if we have to
bring enforcement action. If we need to serve an improvement
notice we have the power to direct compliance with underlying
law in the manner set out in the DC code.
9.Targeting risks in the
DC market segments
9.1. We have identified five segments in the DC market:
• master trusts (multi-employer schemes
with non-associated employers)
• large employer-sponsored schemes
• small and medium sized schemes
• micro schemes
• work-based personal pensions (contract-based schemes).
9.2. A master trust can be defined as an occupational trust-based pension
scheme established by declaration of trust which is or has been
promoted to provide benefits to employers which are not connected
and where each employer group is not included in a separate section
with its own trustees. For this purpose, employers are connected if they
are part of the same group of companies (including partially owned
subsidiaries and joint ventures).
9.3. In contrast the large employer-sponsored, small and medium, and micro
scheme segments may consist of either single employer participation or
multiple employer participation. The employers in these arrangements
are connected by virtue of being part of the same group of companies
(including partially owned subsidiaries and joint ventures).
9.4. Trustees of occupational DC trust-based pension schemes should be
able to demonstrate that the DC quality features are present in their
scheme. We expect this to be addressed in a variety of ways, depending
on market segment.
9.5. Master trusts
9.5.1. Master trusts are typically industry-wide, insurer-provided or noninsurance provider trust-based pension schemes. They have the
potential to deliver good member outcomes through economies
of scale, professional governance and consolidation
of resources.
9.5.2. However, achieving the right balance of supply and demand
side forces is a crucial factor. Because master trusts operate on
the basis of scale, we would be concerned to see the number of
master trusts grow significantly. We would expect to see the market
operate efficiently with a small number of larger master trusts.
18
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
9.5.3. We have identified a number of characteristics that, if present,
may prevent these schemes from delivering good outcomes.
These are:
• conflicts of interest as a result of the relationship between
the provider and trustees
• decision-making powers vested with the provider
rather than trustees
• a lack of independent oversight in some master trusts – unlike
traditional occupational DC schemes, member and employer
representatives are unlikely to be involved in important
decision-making processes
• complex and opaque investment structures.
9.5.4. Based on our analysis of this segment and as master trusts are
likely to be one of the products of choice for many employers, we
have concluded that it is prudent for the regulator to develop,
in conjunction with industry, a regulatory framework which
addresses the inherent complexities in this segment.
9.5.5. We will expect master trusts to implement voluntary disclosure
that will enable them to demonstrate consistency with standards
in the DC code and DC regulatory guidance.
9.5.6. We will also expect master trusts to obtain independent
assurance that will provide an additional layer of rigour and
enable schemes to demonstrate that they are credible and viable.
We are working with the audit profession and others to develop
a voluntary assurance framework that will enable master trusts to
obtain an independent opinion having regard to an international
standard or UK framework such as Audit and Assurance Faculty
(AAF) Technical Release 02/077.
9.6. Large employer-sponsored schemes
9.6.1. We define large employer-sponsored trust-based pension
schemes as those with over 1,000 members. They tend to have
high standards of governance and may offer economies of scale
and a high level of trustee and employer engagement. Our
research has shown that these schemes are more likely to be able
to demonstrate the DC quality features that drive good member
outcomes than small and medium sized schemes.
9.6.2. There are some important DC-specific governance issues that
we believe need to be addressed in some large occupational DC
trust-based pension schemes. For example, a significant number
of schemes in this segment are hybrid schemes, where trustees
should share a sufficient amount of time on both DC and DB
related matters. However, in practice trustees may find it hard, or
are unable to dedicate sufficient time to DC issues.
19
7
Available at www.icaew.com/~/
media/Files/Technical/technicalreleases/audit/AAF-02-07Assurance-Reports.pdf
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
9.6.3. We believe that using our DC code and DC regulatory guidance,
trustees of these schemes can rise to the challenges of DC
governance.
9.6.4. We will expect large schemes to adopt a voluntary disclosure
framework that will enable them to demonstrate consistency with
standards in the DC code and DC guidance.
9.7. Small and medium sized schemes
9.7.1. We define small and medium sized trust-based pension schemes
as those having between 12 and 999 members. While there are
examples of small and medium schemes that display quality
standards, there are a number of barriers that may inhibit good
member outcomes.
9.7.2. These schemes tend to have limited resources, lack
economies of scale, and have lower trustee engagement and
limited access to quality independent advice. Our research
suggests that as schemes decrease in size, they are less likely to
be able to demonstrate the presence of the DC quality features
that we consider to be crucial in delivering good member
outcomes to members.
9.7.3. Given the constraints within this segment and the challenges
that trustees of existing schemes already face, we do not expect
to see existing or newly established schemes that fall within this
segment being used for automatic enrolment. We encourage
employers to move away from small-scale schemes on the basis
that they are less likely to deliver good member outcomes.
Consequently, employers and trustees of existing smaller schemes
may determine that the interests of members (both active and
deferred) may be better served in larger scale schemes, and we
will help support this transition.
9.7.4. Trustees of small and medium sized trust-based pension
schemes should also adopt a voluntary disclosure framework
that will enable them to demonstrate consistency with the DC
quality features.
9.7.5. We expect disclosure to follow the same approach as master
trusts and large schemes, and do not expect scheme size or
proportionality to be an excuse for lower standards of quality in
this segment.
9.8. Micro schemes
9.8.1. Micro schemes are occupational DC trust-based pension schemes
that have between two and 12 members. They include small selfadministered schemes (SSASs) and executive pension plans.
9.8.2. The vast majority of these schemes were not designed for the
mass market; in many cases the members themselves are trustees
of these schemes. We would not expect these schemes to be
used for automatic enrolment.
20
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
9.8.3. Operation of micro schemes is based on close member
participation and engagement in important areas of governance
such as investment. Based on these characteristics, we expect
to have a targeted role in the regulation of these schemes. Our
regulatory interest will focus on protecting member assets from
fraud or malfeasance and we will continue to work closely with
HM Revenue & Customs (HMRC) to ensure that these schemes
are appropriately regulated.
9.9. Work-based personal pensions (contract-based schemes)
9.9.1. The Pensions Regulator believes the regulatory framework for
work-based DC pension schemes should offer similar levels of
member protection regardless of whether an employer chooses
an occupational DC trust-based pension scheme or a work-based
personal pension.
9.9.2. Therefore, we expect the DC quality features to be present in all
work-based DC pension schemes, including work-based personal
pensions where the FSA shares the task of regulating.
9.9.3. This is especially important given that the coming of automatic
enrolment is expected to result in a growing uptake of workbased personal pensions, in addition to growth in some forms
of occupational trust-based pension schemes, in particular
master trusts.
9.9.4. We have carried out an analysis of the degree to which the
FSA regime for work-based personal pensions already includes
provisions that match The Pensions Regulator’s DC quality
features. Our analysis suggests that the FSA’s regulatory regime is
in many ways parallel to the regulatory framework that applies to
occupational DC trust-based pension schemes.
9.9.5. We are working closely with the FSA to achieve consistent
standards and levels of protection across the DC landscape and,
later in 2013, we expect to produce a final version of our analysis
on how member benefits are protected in work-based personal
pensions. There may also be a need to agree joint working
protocols with the FSA to determine how breaches of the law can
be dealt with between regulators to ensure we have a coherent
and effective regime.
9.9.6. We will also, if appropriate, produce guidance to fully clarify our
position on what constitutes good governance in work-based
personal pensions.
21
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
10. Measuring success
10.1. We want to evaluate the impact that our regulatory approach will
have by measuring change in both trust-based schemes and workbased personal pensions.
10.2. Occupational DC trust-based pension schemes
10.2.1.Research we carried out in 2012 provides evidence of how
schemes have interpreted the draft DC quality features, how
they demonstrate their presence and how they believe they
would incorporate them.
10.2.2. It indicates that larger schemes were significantly more likely
to have the features present compared to smaller schemes.
Three quarters (75%) of large schemes reported that 15
features of the 21 tested were present in their scheme,
compared to a half (51%) of medium schemes and under a
fifth (18%) of small schemes. We will use these results as our
baseline.
10.2.3. We will commission a further survey once we have given
time for the DC code and DC regulatory guidance to bed
in. This will determine the effectiveness of the regulatory
tools we have provided and assess the extent to which
we have influenced change. The follow-up survey will also
measure the extent to which DC quality features are present
in schemes and provide the bedrock for disclosure.
10.2.4. We will measure the number of schemes that adopt a
voluntary comply or explain regime, using our scheme
return to capture this information.
10.2.5. We will monitor the number of schemes that provide
additional disclosure around the presence of DC quality
features and how they have been embedded into their
scheme’s governance arrangements.
10.2.6. We will ratify these indicators with results of our targeted
scheme governance reviews (thematic reviews), where
we will examine – for a sample of schemes – the extent
to which they meet the required standards and quality of
disclosure. We may use this approach to focus on specific
risks relevant to each DC segment.
10.2.7. For master trusts, we will monitor the number of schemes
that are obtaining independent assurance reports which will
test the design, description and operational effectiveness
of control processes that underpin the DC quality features.
Given the low number of master trusts, we expect to use
telephone campaigns or stakeholder engagement to gather
this information.
22
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
10.2.8. We will analyse data drawn from scheme returns to assess
changes in the occupational DC trust-based landscape. We
will test whether the market has consolidated, with growth
in large-scale provision and evidence whether trends
suggest a move away from small-scale provision.
10.2.9. Over the longer term, we will also look to measure the
efficiency of schemes in converting contributions to
retirement income. This will help to further test and build
our evidence base about which characteristics are most
important in delivering good member outcomes.
10.2.10. Alongside these indicators we will also measure the
results of each intervention we make, for example through
education campaigns, thematic reviews or interventions in
individual cases.
10.3. Work-based personal pensions (contract-based schemes)
10.3.1. We are conducting research in early 2013 to benchmark
the presence of our DC quality features in work-based
personal pensions. Once we have reviewed these findings
we will consider with the FSA how far the presence of the
features will require further monitoring, and who should be
accountable for this.
11. Publishing our
enforcement activities
11.1. We are committed to publishing a specific enforcement report
once a year and we will also include the use of our powers in our
annual report. We will publish details of activities that we have
undertaken, such as targeted scheme governance reviews, as well
as our enforcement successes and educational activities.
23
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
Appendix – our six
DC principles
The six DC principles
Principle 1: Essential characteristics
Schemes are designed to be durable, fair and deliver
good outcomes for members
Principle 2: Establishing governance
A comprehensive scheme governance framework is established at set up,
with clear accountabilities, and responsibilities agreed and made transparent
Principle 3: People
Those who are accountable for scheme decisions and activity understand
their duties and are fit and proper to carry them out
Principle 4: Ongoing governance and monitoring
Schemes benefit from effective governance and monitoring
through their full lifecycle
Principle 5: Administration
Schemes are well-administered with timely, accurate and
comprehensive processes and records
Principle 6: Communications to members
Communication to members is designed and delivered to ensure members
are able to make informed decisions about their retirement savings
24
Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach
How to contact us
Napier House
Trafalgar Place
Brighton
BN1 4DW
T 0845 600 0707
F 0870 241 1144
[email protected]
www.thepensionsregulator.gov.uk
www.trusteetoolkit.com
Draft Regulatory approach
Ensuring good governance and administration in work-based
defined contribution pension schemes
© The Pensions Regulator January 2013
You can reproduce the text in this publication as long as you quote The Pensions Regulator’s name
and title of the publication. Please contact us if you have any questions about this publication. We can
produce it in Braille, large print or on audio tape. We can also produce it in other languages.