Defined contribution schemes risk punishment by the Pensions Regulator if they fail to tell members the impact of contributions on their retirement. Ian Smith looks at how DHL and others are meeting the challenge
Schemes which fail to shape up to the regulator's strengthening focus on DC governance could have trustees removed, or independent trustees forced on them.
The DHL Group Retirement Plan has a separate, trust-based DC section. Scheme secretary Bob Sherratt said he had the statement in front of him, and would pass it on to that section of the scheme.
"What we have here is a separate committee of our main trustee board which deals with DC matters," he said. "It is something we would put in front of them."
He added there was nothing he could see in the statement – such as the importance of the messages on employee contributions – which was not already in place, or on the agenda, for this section of DHL's DC scheme.
"Most of the things have been dealt with, or they are on the business plan," he said.
In its latest statement, the regulator said it expected schemes to inform members of the impact of their contributions on their retirement income. It also warned it viewed active member discounts – where deferred members pay higher fees than active ones – as unacceptable.
The statement, written for schemes with more than 12 members, said only one in three DC trustees (34%) are engaged with their scheme.
The watchdog also called on trustees to make sure they have the correct knowledge level among trustees, and control of their administration costs through independent reports.
Schemes such as the DHL Group Retirement Plan are falling into line with the regulator's stance.
For the rest, DC advisers said scheme managers and trustees should improve their communication and training, and review their administration, to reduce the risk of regulatory backlash.
Shaping up
One requirement regarded member communication on contributions.
“Trustees must ensure members are aware of the impact contribution patterns will have on the overall size of their pension fund," it read.
Mark Jaffray, senior investment consultant at Hymans Robertson, said the regulator was increasing the weight placed on member outcomes.
He said: "That is a real signpost to trustees that they must start making members understand what they may get back in retirement, and how poor they may be if they do not start saving."
DC schemes are also called upon to "continually" assess how effective their third-party administrators are, including seeking independent assurance reports.
Jaffray welcomed this aspect of guidance, saying the consultancy had witnessed lots of costly mistakes in this area.
Trustee knowledge and understanding. Schemes need to make sure their trustees have the required DC knowledge, and to give training where necessary;
Conflicts of interest. Trustees must demonstrate impartiality, implement a specific policy and disclose any non-trivial conflicts;
Costs and charges. Charges must be transparent and allocated fairly; not split unevenly between different categories of members;
Investment. Schemes must ensure the appropriateness of all funds and especially the default;
Asset protection. Investments offered should be predominantly in regulated asset classes, and safety nets for provider default should be established;
Administration. Schemes need quarterly meetings, a risk register and effective monitoring of third parties;
Contributions. Members should be made aware of the impact of contributions on their retirement, and all money should be in step with auto-enrolment requirements for 2012.
From the regulator's DC statement.
Alan Morahan, a principal at Punter Southall, said the regulator was trying to demonstrate its shifting focus from DB to DC.
“It will be a lot more about understanding risk and volatility," he said. "From a member’s perspective, do they understand the fund they are getting involved in?
“A 10% underperformance at any given point could push their retirement date out by three or four years.”
Such communication would demonstrate to members the real-life impact of stock market volatility and the potential downside of more risky investments.
He added many scheme decision-makers would admit in their “heart of hearts” DC governance required improvement, and a lack of training could be contributing.
“It may well be that is where schemes are getting it wrong is to diminish the complexity that is in their DC scheme," he said.
Consequences
In January, the regulator published a discussion paper on enabling “good member outcomes”, focused around six key elements. These were investment, contribution, decumulation, administration, asset protection and value for money.
In the latest statement, the regulator said it would continue this dialogue “to help develop our understanding of what good looks like”, and will publish statements and tools to help define it.
The regulator added: “The longer term strategy will be to develop an operational framework which will enable us to determine compliance with standards of good practice and behaviours.”
Early the next year, the regulator this compliance strategy to inform auto-enrolment, which it is understood will include more information on the consequences of not complying with its requirements on DC governance.
