The Pensions Regulator will make its defined contribution code of practice easier for scheme managers to understand after feedback that the line between pensions law and best practice was not clear enough.
The final DC code of practice is expected to be released later this week, following industry consultation on a draft version released in July.
Penalties for non-compliance
The regulator may use its formal information-gathering powers under section 72 of the Pensions Act 2004.
It may ask the trustees to undertake activity to build their knowledge and understanding of the relevant issues through, for example, the trustee toolkit.
If investigations show the scheme is not meeting the expected standard, there is a range of powers it may use, such as producing a skilled-persons report to identify the extent of the issues.
An improvement notice and/or accompanying third-party notice may be issued to direct certain actions to improve standards in the scheme.
If investigations indicate a serious risk to member’s benefits or there is evidence trustees are not able to run the scheme to the required standard, the regulator may consider appointing an independent trustee to either work alongside or replace the existing trustees.
“This version will be shorter, much clearer as well as making it clear the division [between] the legal requirements and what is best practice,” said Andrew Warwick-Thompson, executive director for DC, governance and administration at the regulator.
The majority of large schemes are already complying with the principles set out in the code, he said, but they may tweak the way they demonstrate compliance with the code.
“If we come and ask you for evidence of your steps, you should also be able to produce evidence that you’ve reviewed it within the last three years [and] that the content of your steps complies with the guidelines,” he said.
It is always good practice for schemes to document what has driven them to a particular course of action, said Jan Burke, head of DC at Aon Hewitt.
“It’s very difficult to say you’re unreasonable if you have evidence you’ve tried your best,” he said.
To ensure smaller schemes comply with the principles set out in the code the regulator will take an 'educate and enable' approach in the first instance, with potential enforcement action if necessary (see box).
The wide-ranging draft code covered 31¹ features of quality DC provision.
But Gurmukh Hayre, head of DC at KPMG, said, it would have been clearer if the features were ordered according to its six principles.
“The code is a new regulatory framework for trust-based schemes but we still have a void when it comes to other workplace schemes and this code doesn’t directly cover these schemes,” he added.
However this would be the responsibility of the Financial Conduct Authority, which governs contract-based schemes, he said.
Many smaller employers will not have the resources to go all the way in their compliance with the best practice principles, Burke said.
“I think as far as comply [or] explain, the thing to clarify a little bit more for smaller and medium employers [is] what acceptable is,” he said.
¹There are 31 features of quality DC provision in the regulator's code. The original version of this article, published November 20 2013, stated incorrectly that there were 37.
