The Pensions Regulator

Highlighting the importance of good administration - the regulator's view

Article published: Engaged Investor, March 2008

Good scheme administration is vital in reducing the risk to members’ benefits – and promoting the good running of work-based pension schemes is one of the key objectives of the Pensions Regulator. While this is important to both DB and DC schemes, in our recent DC Update we identified poor administration practices as one of the five main risks to members of DC schemes.

We are working to ensure that those involved in running pension schemes have the necessary skills and knowledge which allow them to put in place and maintain efficient administrative practices. Our primary aim is to educate and enable trustees to perform their role competently, but we will use our powers to act where necessary, for example if we see persistent or very serious malpractice.

At the heart of our strategy is the Trustee toolkit, our free e-learning programme. Built around scope guidance – a document compiled after extensive consultation with the industry, setting out what trustees need to know and understand – the toolkit considers the trials and tribulations of a fictitious board of trustees.

There are various episodes within the toolkit where we promote the importance of good administration. For example, the trustees uncover situations where the record-keeping has been less than ideal, leading to member dissatisfaction, and then have to decide how best to rectify the issue. As is clear from the title, the module ‘How a DC scheme operates’ focuses on the particular issues faced by trustees of DC schemes, including ensuring the good administration of the scheme. The final module, ‘Running your scheme’, sees scheme administration as one of the areas needing to be considered under the governance umbrella.

Throughout, the toolkit stresses that although trustees can delegate the day-to-day administration of the scheme, they can not delegate overall responsibility for it. The trustees are responsible for the smooth-running of the scheme: it is to them that members will look if they have questions, or if things go wrong.

Complementing the learning of the toolkit, we are planning to produce material providing examples of administrative good practice, with particular focus on the importance of good record-keeping. We are conscious, however, of the many industry initiatives already running in this area, and will seek to ensure that duplication of work is avoided. 

It is when trustees come to wind up their scheme that the importance of having good administrative practices can really be seen. The Pensions Regulator, together with the Pensions Protection Fund (PPF) and the DWP (in respect of the Financial Assistance Scheme) have recently published a joint statement for consultation on the regulation of schemes in wind up or in a PPF assessment period. The statement outlines expectations that schemes already winding up should complete the key activities as soon as possible and certainly within two years, while schemes entering wind up in the future should complete at least the key activities within two years. Similar expectations are set out for schemes qualifying for the FAS and those in a PPF assessment period.

One of the most common reasons for delaying the wind up process is the inadequacy of the scheme records – a particular problem where the employer has acquired and/or disposed of businesses frequently. In a wind up situation, especially where the administration has been supplied to the trustees via an in-house team employed by the sponsoring employer, it is likely that key members of the team may leave. If records have not been kept up to date, including details of the various changes to the scheme membership, there may be elements incomplete, which is likely to impact on the process of sorting out the records. So the new winding up guidelines, which are currently open for consultation, are also of relevance to ongoing schemes in encouraging them to put good administrative practices in place now to avoid potential problems further down the line.

The team behind the trustee toolkit have been working closely with specialists in the field of wind up and with the Pension Protection Fund, to build a suite of three e-learning modules to provide learning to help trustees wind up their scheme. The first of these, aimed at trustees of solvent DB schemes, is already available. The remaining two, aimed at trustees of DC schemes, and at trustees whose schemes may be eligible for the PPF, will be published soon.

These modules do not form part of the scope of trustee knowledge and understanding and are therefore additional to the main toolkit. They consider the administration side of the wind-up process – the auditing of membership records – as one of the biggest and most time-consuming task in the process, and emphasise the importance of good administration.

Good administration is crucial to the smooth running of schemes. Poor administration can not only have a negative impact on individual members, but can also cause major problems if the time comes when the scheme needs to be wound up.

The toolkit can be accessed at http://www.trusteetoolkit.com/.

Published: Engaged Investor, March 2008