The Pensions Regulator

Q&As: DC schemes

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Governance

What does the regulator expect of those who run pension schemes?
Should we set up a management committee for our GPP?
How do we set up a management committee for our GPP?
What actions does the regulator expect schemes to take in response to legislation that abolishes contracting out by DC schemes?
What impact will personal accounts have on existing DC schemes?

What does the regulator expect of those who run pension schemes?

• The regulator's view is that members are entitled to expect a scheme to be well-run and this applies whether it is contract-based or occupational.
• Trustees play a vital role in the governance of occupational pension schemes. The regulator's medium term strategy described our desired longer term outcome which is to have in place well-informed, capable trustees acting in the best interests of their members.
• The regulator also expects to see good governance standards on GPPs.
• We provide a wide range of materials to help those running schemes. If you haven't yet familiarised yourself with our training and guidance on DC, you can start by having a look at:
  • the DC module in the Trustee toolkit;
  • good practice guidance on retirement options and the open market option; and
  • employers who have group personal pensions or stakeholder pensions may refer to our guidance on employer engagement.
• For more information on our approach to governance, you can see our discussion paper on governance and the regulator's response 'How the regulator will promote better governance of work-based pension schemes.'

Should we set up a management committee for our GPP?

• We believe it's in members' interests if all employers with a group personal pension or stakeholder scheme arrange for key aspects of its governance and investments to be reviewed periodically.
• Many employers also see benefits for themselves in carrying out a review.

  For example:

  • a scheme with good investment options and good governance is likely to be a more highly valued staff benefit; and
  • it may be effective in mitigating potential risks to the employer (eg by preventing administration errors that could be costly to detect and correct at a later date).
• Any governance arrangement over and above meeting basic legal obligations, for example paying contributions on time, is voluntary for employers. Our guidance does not add to these obligations.
• There is no one-size-fits-all approach to reviewing a personal pension or stakeholder scheme. It is for employers to decide what type of governance structure works best for them – examples include:
  • a management committee;
  • their financial adviser;
  • involving employee representatives; and
  • involving the trustees of any existing occupational scheme (such trustees need to be mindful of their fiduciary duties to members of the occupational scheme and aware of any potential conflicts).
• Our qualitative research in 2007 found that a significant proportion of all employers with a GPP had some form of governance arrangement in place, albeit some were very informal.

  We expect that figure to grow as employers realise the value of having a mechanism to ensure that their scheme continues to operate efficiently and be fit for purpose.

• Our guidance on voluntary governance arrangements in GPPs includes case examples.

How do we set up a management committee for our GPP?

• Any governance arrangement over and above meeting basic legal obligations, eg paying contributions on time, is voluntary for employers. Our guidance does not add to these obligations.
• There is no one-size-fits-all model for management committees so employers who decide that a management committee is the best approach for them can choose a structure suited to their own circumstances.
• Many employers issue terms of reference to their committee to clarify their remit.
• Employers often ask management committees to review scheme administration, investment practices and options, and member communications and report back to them with recommendations.
• Find out more in our guidance on voluntary governance arrangements in GPPs which includes case examples and specimen terms of reference.

What actions does the regulator expect schemes to take in response to legislation that abolishes contracting out by DC schemes?

• The government proposes that from a date to be announced, likely to be 2012, employers will no longer be able to use their occupational DC scheme to contract out of the state second pension.

  Members of GPPs also will not be able to use their GPP to contract out of the state second pension.

• The regulator is part of a working group set up by the Department for Work and Pensions and HM Revenue and Customs (HMRC) with representatives from industry to look at what the cessation of contracting-out will mean for pensions and, in particular, how to communicate these changes.

What impact will personal accounts have on existing DC schemes?

• Personal accounts are intended to reach those employees without access to an existing scheme - therefore legislation has been constructed by government so that employers may continue to offer pension provision through existing DC and other schemes.
• Such existing schemes would need to meet certain qualification criteria (eg contribution rate, auto-enrolment).
• As at present, it's proposed that it will be the employers' choice as to what pension scheme to offer employees, with the additional choice of a new personal accounts scheme for those employers not wishing to offer an alternative scheme.

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