In defence of the regulator's DC code, six months on

Regarded by many at the time as the most significant change to DC pensions in years, much has happened since. The chancellor has announced proposals for sweeping changes to DC arrangements and the Department for Work and Pensions is consulting on the introduction of statutory governance standards for DC schemes.

Are the regulator and DWP right to press DC pension schemes to devote more time, resource and expertise in order to improve member outcomes?

One only has to look at the results of recent governance surveys to understand their reasoning: trustees of DC schemes have tended to show less governance activity than those of defined benefit schemes.

We are also nearing a point in time when the assets in DC schemes are expected to overtake those in DB. The former can no longer be regarded as the poor relation when so many people are now relying on DC for their financial wellbeing in retirement.

It has long been recognised that good governance of pension schemes will deliver better outcomes. Improved risk control, accountability and performance management all serve members well compared with a hands-off approach.

An increasing burden

But is the regulator expecting too much of trustees, as asserted in a previous Informed Comment by the Pensions Management Institute’s president Paul Couchman?

I would liken what the regulator is doing for DC schemes to what it has done for DB schemes in recent years.

As for demands on DB trustees around funding when they were first introduced, these increased expectations may seem unreasonably demanding now but will no doubt soon become woven into the fabric of how DC schemes are operated in time.

Most trustees in the former camp believe the regulator’s focus on risk management and trustee diligence has helped improve the governance of those schemes.

And this raising of standards has been achieved largely by setting out a template for best practice backed by ‘comply or explain’ methodology, rather than by extensive new rules and regulations.

It seems reasonable to assume that a similar approach will gradually yield similar gains for DC schemes, without decision-makers feeling overburdened by new rules.

While there could be fewer quality features – and perhaps the regulator has missed an opportunity to emphasise the importance of planning for retirement in its quality features – it doesn’t expect overnight compliance; that is why the governance statement should be structured in such a way as to set out future plans for improvement.

The right questions

The regulator is right to be demanding. It should not tailor its ambitions to the capacity of some trustees to deliver to its expectations.

Trustees need to recognise not all risk is transferred to members in a DC arrangement and that there is much they can do to support and protect the member’s lot in this context.

Through the comply-or-explain regime, there is the opportunity to demonstrate to members the impact of their work and as a result, to improve perceptions of value and levels of engagement.

There is no doubt that better governance around the six key areas identified by the regulator will deliver better member outcomes, even in the pensions world that is poised to be turned on its head.

As the new world order signalled by the chancellor in his 2014 Budget statement brings more choice and more complexity, the need for a diligent and conscientious board working to improve member outcomes will be greater.

If the next retirement savings scandal is to be avoided, these challenges must be embraced. Those who cannot build governance frameworks internally should consider buying externally.

Government and employers, alongside the work of trustees, must also do their part to increase what is paid into the schemes on behalf of members in the first place if people are to retire with comfortable means.

Rachel Brougham is a principal in Mercer’s defined contribution and savings team