Regulatory guidanceVoluntary employer engagement

There is no legislative requirement for any governance arrangement over and above ensuring that you, as an employer, meet your legal obligations (for example, contributions being paid on time).

This guidance is not therefore concerned with how to comply with legislation and does not propose any new requirements on employers over and above those that already exist.

The Pensions Regulator does not favour one type of governance arrangement over another and encourages you to choose whatever works for your situation. We believe that voluntary employer engagement improves the protection of members' benefits and promotes good administration.

Work place contract-based schemes are regulated by:

• The Pensions Regulator; and
• The Financial Services Authority (FSA).

Our joint publication, 'A guide on the regulation of work place contract-based pensions (PDF)' explains the main regulatory focus of each regulator and gives an overview of employers' legal obligations.

We've consulted the FSA in developing this guidance. Both organisations share the view that voluntary governance arrangements are a matter for employers.

Employers who establish a governance arrangement do so for a variety of reasons, often to do with how the scheme is working in practice at employer level. The purpose of the governance arrangement and the employer engagement activities is not to do the job of the regulators, but rather to complement what they do.

There are three main types of work place contract-based schemes:

• group personal pensions (GPPs);
• group self-invested personal pensions (group SIPPs); and
• group stakeholder pensions.

In this guidance we use the term GPP to cover all these types of arrangements. They all involve an individual contract between the provider and the member. The employer does not usually have any direct contractual relationship with the provider. As an employer, you would normally receive advice from an adviser, who may also be asked to advise employees. 

In recent years, there has been a marked increase in the number of employers of all sizes offering GPPs to their employees. Our discussion paper, 'The governance of work-based pension schemes (PDF)' highlighted the governance issues in relation to GPPs. Paragraph 12.39 commented: “We believe there can be value in the employer having an ongoing role in reviewing the scheme. This can be achieved in several ways, and it is for employers to decide which suits them best and what level of employee involvement is required.” 

The response to our consultation, 'How the regulator will promote better governance of work-based pension schemes (PDF)', concluded that we should continue with the approach that the extent of voluntary employer engagement in GPPs is a matter for employers to decide on, and that we will provide guidance for employers' information. 

Our recent research (PDF) has found that approximately half of all employers have some form of governance arrangement in place for their GPP. Benefits of such governance arrangements for employers of all sizes can include the following:

• Employer engagement can lead to a better quality arrangement and therefore mitigate against the risk that your scheme is perceived as poor quality which may reflect badly on you and may affect how easy it is for you to attract and retain staff.
• Increased engagement can save time and money by preventing problems that could be costly to put right. For example, if a provider is given incorrect payroll information about a member and this is not identified for some time, this could lead to contributions being paid at the wrong level. Such errors can be time consuming to put right.
• It can improve member understanding of, and confidence in, the pension offered and hence improve take-up and appreciation of the pension scheme by members.
• It can help prevent problems further down the line (eg investment performance, service standards). For example if the provider's  investment performance is consistently poor in relation to other providers over a long period and the employer has not been monitoring this or taking any action (eg raising the matter with the adviser or provider) this may create a source of friction between employees and you. 
• It can provide members experiencing problems with a collective voice and be a focal point for employee involvement. For example, if a number of members are having problems with the provider's administration, those involved in the governance arrangement can take them up on members' behalf.
• DC schemes involve different risks for employees compared to DB schemes and the introduction of voluntary governance arrangements such as management committees may be one way you can help mitigate these risks, for example, by reviewing employees' education and information requirements. Our recent research (PDF) found that poor member understanding is perceived by those running DC schemes to be the most serious risk of such schemes. 

Many employers and their legal advisers have concluded that some type of governance arrangement for their GPP may be an effective tool to mitigate potential risks to the employer – for example, rectifying administration errors by the employer, low level of benefits or poor quality of scheme leading to member complaints.

Any employer putting in place a pension scheme should seek legal advice about their specific circumstances. 

The FSA has produced a brief guide clarifying what you can do to promote your GPP.

In relation to selecting a provider, there are special rules relating to stakeholder pensions which mean that you are protected from any legal claim by employees regarding the choice of provider and monitoring of their performance.  

Potential confidentiality issues under the Data Protection Act 1998 need to be considered regarding the disclosure of information about fellow-employees.

We recognise that your commitment to pay contributions to your GPP represents a key form of employer engagement.

You can choose who to involve in the governance of your GPP. If you are a smaller employer with fewer staff you may have fewer options, for example, many do not have separate HR or finance functions, but many still have one or more staff involved in the review of their scheme.

Some employers share resources and form a combined group to monitor the arrangements where they have a common provider.

In addition to its legal role and responsibilities as a party to the contract, the provider may produce a quality assurance report designed to give comfort to the employer around a range of criteria (eg, service standards, allocation of contributions, complaints, charges).

Providers may also provide reports on scheme data, such as numbers of joiners, members, leavers, retirements, deaths, contributions and fund choices. There may be a service level agreement in place between the provider and the employer, for example in relation to the process for administering payments, to ensure that contributions are paid in a timely and accurate manner.  

We do not favour one type of governance arrangement over another. You may wish to consider one or more of the following for a role in the governance of your GPP:

Adviser

Your independent financial adviser (IFA) or employee benefit consultant may monitor the operation of the scheme and whether it continues to be appropriate for your circumstances, depending on their terms of engagement by you.

You may pay a fee to the adviser, either a flat rate fee for a periodic review, and/or an hourly rate. The adviser may be remunerated by commission which may be initial commissions paid when new members join, and/or renewal or trail commission based on the ongoing level of contributions or fund value.

In many cases the adviser will want to keep you as a client and by being involved in reviewing the scheme can demonstrate their ongoing value. The adviser's professional knowledge of pensions and their potential commercial influence over the provider (as a provider of potential new business) can make them a valuable contributor to the governance process. To the extent that the adviser is involved in selecting the provider and setting up and running the scheme, their own performance needs to be kept under review.

Employer representatives

Employer representatives may informally review the running of the scheme. In particular, your HR department may monitor the scheme along with other employee benefits, to ensure they are meeting the desired corporate objectives for the scheme, for example.

As the selector of the pensions provider, you have an interest in keeping this service, as with other services, under ongoing review to ensure that it is still meeting the need it was designed to fill. 

Employees

Members may be involved in the governance arrangement to represent the interests of fellow members.

Many employers value the involvement of employees as it provides useful feedback as to what employees want from the pension scheme so it can be tailored to meet their needs. It also can highlight aspects of the scheme which are not working effectively, for example, members may advise that there are delays in actioning requests for information about the scheme.

Employee involvement may take different forms.  It may be informal:

• through a staff forum which gives staff a chance to ask questions regarding the scheme. These may be related to any of the parties involved in running the scheme – adviser, employer, provider, members. The scope of this forum may be limited to the pension scheme or it may cover a range of employee issues; or
• through a union which provides a mechanism for bringing forward questions, issues for discussion and ideas and provides a member voice, as well as representing problems or concerns. With government backing, the Trades Union Congress (TUC) has launched a scheme of 'Pension Champions'. These are employees, who may or may not be union members, who are volunteers trained to deliver pensions information and (non-regulated) advice to their colleagues in workplaces. These individuals may be able to provide valuable information to employers regarding how the GPP is working as far as members are concerned, and to help employers who want to improve levels of member understanding. 

Or employer involvement may be through a more formal management committee.  

Management committees

These are an increasingly popular type of governance arrangement, although there is as yet no dominant or established model for management committees.

A management committee generally has no legal definition and is a term used to cover a diverse and often not clearly defined group of arrangements set up by employers. Appendix A has more information on management committees.

Trustees of existing occupational pension scheme

Where there is also an occupational pension scheme offered by an employer (which may be open or closed) the individuals who act as trustees may be asked to keep the GPP under review as they already have pensions knowledge and can provide a focal point for all pensions-related issues.

Such trustees need to continue to be mindful of their fiduciary obligations to members and beneficiaries of the occupational scheme and aware of any potential conflicts.

Here are two case examples of ways that different employers have chosen to review their GPPs.

You can choose which activities you would like to be undertaken. The activities can be divided into three broad categories:

• member concerns;
• HR – employer issues; and
• monitoring services.

Examples include:

Member concerns

• improving member understanding and engagement, especially in relation to decisions on investment choices and retirement options;
• enhancing communications to members - prospective members, active members, occasionally deferred members and any groups of members that may have special needs;
• the governance mechanism can provide a point of contact for members – through which members may raise issues regarding the scheme;
• providing additional support to members – arranging work-place presentations by the adviser or provider and one-to-one advice by the adviser.

As the policy is in the member's name (not that of the employer), this points to a need for greater engagement by members in GPP arrangements than trust-based schemes.

This suggests a need for more emphasis on member understanding in GPPs, especially where these offer more choice and complexity than a trust-based scheme. Employees can be encouraged to take more interest in their pension and, where appropriate, to take independent financial advice. 

HR – Employer issues

• considering the aim of the scheme, for example, to provide target income replacement level or to provide benefits comparable to competitors to attract and retain staff;
• determining contribution rates/adequacy of benefits;
• take-up (or enrolment) rates;
• numbers of joiners and leavers;
• administration of the deduction and payment of contributions;
• age discrimination issues;
• discussions concerning continuing suitability of the scheme

Monitoring services

• selection and monitoring of provider, for example, meet providers and review their proposals/performance especially in the areas of administration and investment performance;
• reviewing costs/charges of service providers and the services provided;
• numbers of members selecting, and amounts invested in, each fund to monitor investment choices made by members (eg, if many members were choosing specialist funds with a very high or very low risk profile, this may indicate a lack of member understanding and those involved in the scheme's governance may decide to review the scheme literature or request the provider/adviser to send an explanatory letter to the members).  

There are no statutory requirements on those employer and employee representatives involved in the governance of a GPP in relation to their knowledge and understanding, but members of the committee may wish to use relevant sections of our free e-learning programme, Trustee toolkit, particularly modules relating to DC and investment.

Management committees

An increasingly common form of employer engagement is a management committee. 'Management committee' is a generic term used to cover a diverse group.

Management committees tend to have the following characteristics:

• They have a monitoring and advisory role but no executive function, ie no powers (although, where the committee includes members of the employer's senior management, any of its decisions is likely to be agreed by the employer as the same people will be making the decisions).
• They tend to be informal - many do not have formal terms of reference.
• They are established by the employer.
• They may or may not have member involvement. (Some employers seek in their management committee to have a level of member representation similar to the one-third requirement under trust-based schemes.)
• They are voluntary as there is no requirement to have one in place.
• Trust law does not normally apply to them.
• Their activities will depend on the terms of reference of the committee – for example, it may have reference to interests of both employer and employees.
• They generally only focus on active members still employed by the employer (as once a member leaves employment the contract becomes an individual personal pension with no employer involvement).

Management committees offer a range of potential benefits in addition to the general benefits of employer engagement:

• the committee provides a structure for employer engagement;
• terms of reference can clarify the remit of the committee;
• the existence of a committee sends a positive signal to the employees; and
• members know with whom to raise pensions queries.

A management committee may appear under a number of different names such as:

governance committee/group; consultative committee; stewardship committee; monitoring committee; staff forum; pensions committee; pensions forum; pensions monitoring committee; pensions steering committee.

The membership of the committee is the choice of the employer. Examples of members include:

chief executive officer; HR director; finance director; managing director; members; union representatives; trustees of any occupational scheme also offered by the employer. The adviser and/or provider may be asked to attend meetings to provide reports or they may actually be a member of the group.   

Meetings of the management committee need not take a lot of time. They may range from one meeting for a short duration each year to more frequent meetings depending on the committee's remit.

In terms of the committee communicating to employees, a low or high visibility role may be appropriate depending on the committee's role and remit.

Case examples of employer engagement

You can download the case examples of employer engagement (PDF), which includes sample documents, in PDF format.

As management committees are relatively new, we've provided a number of case examples for employers interested in putting one in place.  

Whilst there are aspects of all the case examples which may be of interest to  employers of all sizes, smaller employers may have more interest in the earlier case examples. 

The case examples include the following:

IFA-led

• Case example 1: Group personal pension with IFA support - overview
• Case example 2: Group personal pension IFA Review - overview

Management committees

• Case example 3: Group stakeholder with management committee - overview; terms of reference; objectives and Key

Performance Indicators

• Case example 4: Group personal pension with management committee - overview; governance group objectives 
• Case example 5: Associated multi-employer group personal pension with management committee - overview including terms of reference  
• Case example 6: Group personal pension with management committee – overview; terms of reference
• Case example 7: Specimen meeting agenda for management committee
• Case example 8: Specimen agenda for annual review meeting
• Case example 9: Group personal pension with management committee – overview; terms of reference; and agenda

Industry-wide schemes

• Case example 10: Industry-wide group stakeholder/personal pension – overview; terms of reference
• Case example 11: Industry-wide group stakeholder with representative board of directors - overview

In two of the examples, schemes and related companies are named. Naming should not however be read as an endorsement by The Pensions Regulator.

Case examples should be read as illustrative only and advice should be sought on your scheme's particular circumstances.

We would like to thank Alexander Forbes, Aon, Harris Interactive, SBJ Consultants, Watson Wyatt and others for their valuable help in providing some of the case examples.

You may also want to take a look at the two examples included in Chapter 12 of our discussion paper, The governance of work-based pension schemes (PDF).