Regulator's DC self-assessment tool gets cautious welcome

The regulator has released a scheme assessment template, allowing schemes to judge themselves against its 31 quality features for defined contribution. It has also created a standardised governance statement template.

The tools follow the regulator’s DC code of practice and regulatory guidance, which were released in November last year.

Industry figures welcomed the tools as a way of keeping trustees and advisers focused on the most critical aspects of their schemes.

“One thing it does do is give trustees and consultants a nudge to pay more attention to principles,” said Hugh Nolan, chief actuary at JLT Employee Benefits. “It’s a way of focusing the mind.”

It has been questioned whether self-assessment could create a level of flexibility that limits its effectiveness. For example, one quality feature requires that trustees make arrangements to review “the ongoing appropriateness of investment options”.

“It doesn’t outline ‘appropriate’, there’s no guidance on how often it should be reviewed,” said Nolan.

He added the real progress will be made by schemes who view the assessment pragmatically rather than being too stringent, and wasting money on unnecessary reviews, or ignoring the criteria.

The regulator said that most of the quality features relate to existing legal requirements. 

"Good pension schemes should already have systems and controls in place that will enable them to meet the standards set out in our code and guidance," said Andrew Warwick-Thompson, the regulator's DC governance head. 

"So demonstrating the presence of the DC quality features should not be excessively onerous or complicated," he added. 

The effectiveness of the tools will rely on those using them, and a substandard approach to scheme quality features may indicate problems with a scheme’s trustee board or advisory team.

“Something is better than nothing – the new tools are a good step forward but whether trustees or incumbent advisers are the right people for the job is another question,” said Ian McQuade, client director at Muse Advisory. “I think there’s a need for some context around it.”

As schemes adjust to the new code and implement new approaches to governance, they should be mindful to seek outside advice when assessing, McQuade said.

“The first year will take longer for schemes to go through it,” he said. “If you don’t get external input in year one, you should in years two and three.”

Smaller schemes 

Self-assessment may provide an extra challenge for smaller DC trustee boards, who may lack the resources and experience of larger schemes.

"For smaller trust-based schemes it may be more challenging,” said Laith Khalaf, head of corporate research at Hargreaves Lansdown. “They don’t have the resources of a larger scheme but this is a good way of keeping their focus on quality.”

Despite the challenges of applying a single code to a range of different scheme types, making governance statements mandatory across all schemes could address the government’s questions of minimum governance of schemes, he said.

“It’s quite a good answer to the government’s question on minimum governance of schemes, making employers put out governance statements so everyone can see them,” said Khalaf. “It would be a nice, transparent way to record differences. It might make a good template for other governance of other schemes.”

Nolan said levels of governance have increased in recent years but mostly among trustee boards who were already well engaged.

“There’s a drive to do things better – it has raised awareness in employers to do more for their members,” he added.