The Pensions Regulator this week published its new defined contribution code of practice, clarifying its position on a number of issues, but experts still had questions about its criteria for assessing value for scheme members.
The regulator released a draft of the code back in November, outlining the need for trustees to have adequate knowledge and understanding, and indicating trustees would need to evidence both their compliance with the code and the actions they had taken in doing so.
Trustees need to make sure they understand and can question
Margaret Snowdon, PASA
Margaret Snowdon, chair of the Pensions Administration Standards Association, said the code in its final form maintains a requirement for trustees to have an understanding of how all aspects of the scheme are run.
“The main issue [is] trustees getting a little closer to the action,” she said. “Trustees tend to take a back seat and rely very heavily on other people. Trustees need to make sure they understand and can question.”
The code itself states that where advisers or service providers are appointed to the scheme, trustees remain accountable.
The code says: “It is therefore vital that trustee boards fully understand the scope of the roles and responsibilities being delegated to third parties and the role of advisers in relation to the scheme.”
It goes on to say it expects trustee boards to be able to demonstrate an ability to manage these relationships.
Value for members
The code emphasises the importance of demonstrating good value is being provided to members of the scheme. This echoes what has already been seen with independent governance committee reports and the debate around value for money. However, experts raised concerns about the effectiveness of the definition.
The code requires trustee boards to calculate “the charges and, insofar as they are able to, transaction costs… to which members' funds are subject; and to assess the extent to which they represent good value for members” on at least an annual basis. As assessment of the value must then be given in the chair’s statement.
However, Rona Train, partner at consultancy Hymans Robertson*, said the focus on services paid for explicitly using the member’s contributions could overlook parts of the scheme covered by the sponsor.
She said: “I have a scheme where the employer pays for all of it, so the statement is impossible to do.”
“Quite often you’ll find the company pays for things like the governance of the scheme,” she said, adding that good governance could have a substantial impact on the value for members.
Responsible investment
The code includes provision for the consideration of non-financial factors such as environmental, social and governance issues when choosing investments.
In line with the Law Commission’s guidance on fiduciary duty, the code allows for trustees to consider ESG factors where they may be “financially significant” or where “you have good reason to think that scheme members share your view and there is no risk of significant financial detriment to the fund”.
Rachel Howarth, policy officer at responsible investment campaign group ShareAction, said while traditionally big investor initiatives around responsible investment were led by defined benefit schemes, “it is increasingly a focus in DC”.
“They’re increasingly recognising there are real financial risks they need to be considering,” she said. “It’s really great the regulator is taking into account these issues.”
*An earlier version of this article stated Rona Train worked at consultancy Aon Hewitt, this has now been corrected.
