We welcome The Pensions Regulator’s (TPR) overhaul to its DC Code, published on 28 July 2016.
This follows a period of consultation and goes by the snappy title of 'Code of practice no. 13: Governance and administration of occupational trust-based schemes providing money purchase benefits'!
The DC Code sets out the standards of conduct and practice that TPR expects trustees to meet in providing defined contribution (DC) benefits, also known as money purchase benefits. Accompanying practical guidance is provided, designed to help trustees run high quality schemes.
The update brings welcome clarity and guidance to the new DC governance standards, with which some trustees have struggled to date, e.g. areas such as assessing value for members and reporting through a chair’s statement.
TPR expects trustees to use the DC Code to check the quality of any defined contribution (DC) pension arrangements they operate.
Trustees are expected to do this on an ongoing basis. In practice, we suggest at least every three years, or sooner in the event of any significant developments, e.g. relevant changes to legislation, scheme membership or service providers.
There are substantial changes from the previous (2013) version:
- language used is more clear, e.g. between legal requirements and TPR’s expectations
- recognises recent legislative changes, i.e. governance standards (value for members, chair’s statement etc), charge controls and pension freedoms
- still built around six key DC principles but updated ones
- accompanying guidance is more helpful and now comprises separate guides to each of the six key DC principles
- assessment framework has been updated – previously based on 31 ‘quality features’
In view of the substantial changes, trustees may wish to bring forward the next quality review of their DC arrangements.
What about AVCs?
TPR expects a proportionate approach to be taken for AVCs, recognising the risks to members in the context of the value of the AVCs to members’ overall benefits.
For schemes where the only DC benefits provided are AVCs, our approach is exactly this - a pragmatic and proportionate review, recognising the nature of the AVCs and assessing only those areas relevant, e.g. the governance standards and charge controls will not apply.
Pension schemes vary, and the benefits they provide don’t always follow standard defined benefit (DB)/DC conventions, for example:
- AVCs are normally DC in nature, but sometimes work on a DB, added years basis – any added years AVCs are outside the scope of the DC Code
- where a DB scheme contracted out of the state pension scheme on a ‘protected rights’ basis (an option from April 1997), DC benefits can arise from members who had short periods of membership and who received a refund on leaving of part of their contributions
- some schemes provide DB/DC ‘underpin’ benefits, e.g. members will receive the greater of benefits provided on a DB or a DC basis. For such benefits where there is no reasonable expectation for them to be provided on a DC basis for any members, we believe the pragmatic approach is to consider these outside the scope of the DC Code
Overall, a thumbs up from us for the updated DC Code - it’s now clearer and comes with more practical guidance. In many areas, the methods trustees may use are not prescriptive and can be tailored to the nature and size of the DC arrangements operated.
A green light to proceed for the many trustee boards which have been waiting for the update before reviewing their schemes.