Draft Regulatory approach Ensuring good … Ensuring good governance and administration in work-based defined contribution pension schemes Draft egulatory approach Contents Introduction

Ensuring good governance and administration in work-based defined contribution pension schemes

January 2013

Draft Regulatory approach

Ensuring good governance and administration in work-based defined contribution pension schemes Draft Regulatory approach2

ContentsIntroduction 3

The case for a new DC regulatory approach 4

Aims and objectives 5

Better regulation 6

Effectively governed, well administered and durable schemes 7

Educating trustees 14

Enabling the market to deliver good member outcomes 14

Our enforcement approach 15

Targeting risks in the DC market segment 18

Measuring success 22

Publishing our enforcement activities 23

Appendix: our six principles 24


1. Introduction1.1. 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.

1 Available at: www.thepensionsregulator. gov.uk/docs/delivering-successful- automatic-enrolment.pdf

Occupational defined benefit (DB)

trust-based pension schemes

Occupational defined contribution (DC) trust-based pension schemes

Work-based personal pensions

Individual personal pensions

Occupational 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 work- based 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.


1.6. 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.

Available at www.tpr.gov.uk/docs/dc-scheme-reg-con-report-2007.pdf

Available at www.dwp.gov.uk/ docs/reinvigorating-workplace-pensions.pdf

Available at www.napf.co.uk/PolicyandResearch/DocumentLibrary/~/media/Policy/Documents/0205_Making_pension_charges_clearer.ashx

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3

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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 objectives3.1. 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.


4. Better regulation4.1. 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.


5. Effectively governed, well administered and durable schemes

5.1. Our regulatory framework for DC is built on the belief that all work-based 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

Content

Sets tone for industry

marketing policy dialogue and

prompt industry self-regulating

initiatives

Review risks in the DC market and set priorities

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

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

Developing our DC strategy in response

to changes in the DC landscape

Audit and assurance framework to demonstrate

consistency with the DC code and

guidance

Comply or explain to disclose consistency

with the DC code and guidance

‘Enabling good member outcomes

in work-based pension provision’,

Jan 2011

‘Delivering successful automatic enrolment’,

Feb 2012

DC principles

Code of practice

Guidance

Education and enablement tools

Casework: thematic and targeted reviews

Trust

Overall DC regulatory approach

June 20122011/12 2013 January 2013 Summer 2013

Mapping of DC principles to FSA regime

Joint thematic reviews

FCA and PRA casework reviews

Contract

DC quality features


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 work-based 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.


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

Table 1: Summary of the DC quality features



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.

DC code

Section reminder header



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.

N/A

Those running schemes regularly review their skills and competencies to demonstrate they understand their duties and are fit and proper to carry them out.

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



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.

DC code



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.

DC guidance

Members are regularly informed that their level of contributions is a key factor in determining the overall size of their pension fund.

DC guidance

Scheme communication is accurate, clear, understandable and engaging and addresses the needs of members from joining to retirement.

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


6. Educating trustees6.1. We expect all trustees to be able to undertake their role competently

and will continue to support trustees of all occupational DC trust-based 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.

Available at www.trusteetoolkit.com5


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 approach8.1. 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.

Available at www.tpr.gov.uk/docs/selecting-a-good-automatic-enrolment-scheme.pdf

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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 co-operation from schemes.

8.2.3. The diagram below shows how monitoring will form part of our regulatory approach for DC.

Regulatory casework: enabling, enforcing

Cas

es

Them

es

Aw

aren

ess

Stan

dar

ds

Education: standards and guidance (activities, behaviours and control processes)

Intelligence-based risk assessments

Proactive thematic and targeted scheme governance reviews

Intelligence reportsWhistleblowingLiaison with other regulatorsRegulatory reviews(Notifiable events)

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.


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.


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 non-insurance 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.


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.

Available at www.icaew.com/~/media/Files/Technical/technical-releases/audit/AAF-02-07-Assurance-Reports.pdf

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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 self-administered 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.


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 work-based 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.


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 work-based 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.


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.


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

How to contact us

Napier House Trafalgar Place Brighton BN1 4DW

T 0845 600 0707 F 0870 241 1144 E [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

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