As the Pensions Regulator steps up its drive to improve governance among DC schemes, advisers are calling on schemes to put in basic governance processes to reduce risk and raise returns for members
The regulator's latest annual report showed less than half of small defined contribution (DC) schemes had implemented a formal governance process for identifying and recording risks.
Consultants have called on decision-makers at small DC schemes to implement risk registers and other checks and balances to reduce the risk of poor governance, which could prove costly to scheme beneficiaries.
These safeguards will also ensure they are receiving value for money from investments and third-party advisers.
The regulator is increasing its focus on governance among small DC schemes after figures show the number of schemes affected by trustee suspensions more than doubled over the past year.
It has highlighted the important governance role scheme managers and trustee boards can play in scrutinising the activities of all trustees to make sure they are “fit and proper” and not at risk of suspension.
Its annual report reiterated the findings of the recent governance survey that the overall percentage of small defined benefit (DB) and DC schemes which have a risk register is 56%.
A good majority of small DB schemes (70%) have a risk register in place, whereas under half of small DC schemes do (48%).
“This is the same proportion as last year, so we failed to meet our target of achieving an increase,” said the report.
“Overall, this result falls below our 66% target. We will continue to focus on improving standards in this area and will now measure this twice yearly in summer and winter 2011 and report on progress.”
The report also revealed its enforcement case teams made referrals to its determinations panel which resulted in the suspension of trustees in “more than 250” schemes.
The number of schemes with trustees suspended was well up from “over 100” last year – though this does not necessarily mean a greater number of suspensions, as those suspended will commonly be attached to a number of schemes.
These suspensions are made when there is considered to be a threat to the security of members’ benefits from the trustee involved. They are suspended and replaced by an independent trustee appointed from the regulator’s register.
The schemes which have had trustees suspended are predominantly small DC arrangements, a segment of UK workplace pension provision where the regulator is facing its toughest governance challenge.
In this week's response to its discussion paper , the regulator said the Investment Governance Group could be expanded to provide a legal framework for accountabilities in DC schemes.
Michael Clark, head of pensions trusts at Capita Hartshead, said a DC scheme should be viewed as another division, or subsidiary, of the company, and needs set governance controls.
Though small schemes do lack the resources for arduous processes, and cannot always afford the best advice, he said, a preliminary governance structure “need not” cost the earth.
DC schemes should establish the basics:
Investment risk: what funds members are invested in; the performance of the default fund; assessing whether the investment manager is doing a good job.
Conflicts of interest: demonstrating transparency in the way the scheme is run; setting reviews of all third parties, including professional trustees, every year or two.
It is the latter which will help schemes to ensure all professional trustees and persons connected to their scheme pass the “fit and proper” person test, and are providing what they promised to a scheme.
Clark added: “If you are not doing what is expected, and there is a gap for whatever reason, you need to resolve that gap.”
Setting the safeguards
Good governance is seen by the regulator as the key to reducing the amount of trustees suspended, so done under the following circumstances:
If there is a petition against an individual or corporate trustee to adjudge them bankrupt, or proceedings trying them for a dishonest or deceptive offence.
A trustee is found not to be “fit and proper”, a subjective term which is generally understood as acting in the members’ best interests.
The latter, more important category could include active fraudulent use of assets, or not giving due care and attention to member benefits.
A spokesperson for the regulator said scheme managers and other personnel play a vital role in self-scrutiny.
They said: “Where there is one, you have got a check and balance, someone who can oversee part of the governance themselves.”
David Ferris, senior consultant at Punter Southall, said auto-enrolment and increased assets was helping to shift the focus onto DC governance, which it had been previously overlooked by employers.
Schemes can benefit from risk registers and governance focusing trustee meetings and defining roles of responsibility.
He said: “It provides the focus as the meetings come around – this is why we are sat here, and this is what we are talking about.”
“One occupational scheme I deal with has a plan in place which brings up who is responsible for what at various parts of the year.”
This plan, he added, which runs on to 2012 and 2013, schedules adviser reviews and provides a complete overview of the DC’s business plan “on one piece of paper”.
