Wednesday 07 Dec 2011 @ 12:48
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Six principles for good workplace DC

The Pensions Regulator will invite the pensions sector to take part in a dialogue on six principles for good design and governance of workplace defined contribution (DC) pension provision, which will form the basis of its regulatory approach going forward.

Publication of the high-level principles is the next step in the regulator’s ongoing engagement with the pensions sector to improve standards of DC provision and ensure that the pensions sector is ready to support automatic enrolment.

The six principles span the lifecycle of a DC scheme from the design and set-up phases through to the ongoing management - including monitoring of scheme governance, accountability, scheme administration, and communications with members.

Speaking at the National Association of Pension Funds Trustee Conference today (Tuesday, 6 December), The Pensions Regulator’s chief executive Bill Galvin said the regulator would work with stakeholders to develop a shared understanding of the principles, with a view to publishing further tools and guidance on the features of a good DC scheme next year. To inform this work, the regulator would engage with trustees, industry, employer and member bodies.

Bill Galvin said:

“It goes without saying that all schemes should be designed and run in their members’ best interests, and be capable of delivering a good outcome. But at present DC standards are mixed with too many schemes providing poor value for money.

“We want to work with the pensions sector to establish a shared understanding of what a good DC scheme looks like - and for all schemes to be able to meet these standards. This will help employers to feel confident that they are choosing a quality scheme for their workforce, and for members to feel confident that their pension pots are safe and well-managed.”

The six principles for good design and governance of workplace DC schemes are as follows:

  • Principle 1 - Schemes are designed to be durable, fair and deliver good outcomes for members

    This principle covers the features necessary in a scheme to deliver good outcomes for members, including features such as the provision of a suitable default fund, transparent costs and charges, protected assets and sufficient protection for members against loss of their savings.
  • Principle 2 - A comprehensive scheme governance framework is established at set-up, with clear accountabilities and responsibilities agreed and made transparent.

    This includes identifying key activities which need to be carried out, and ensuring each of the activities has an ‘owner’ who has the necessary resources to carry out the activity.
  • Principle 3 – Those who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them out.

    This principle ensures that those who are given accountability or responsibility for a key governance task are able to carry this out. The principle will cover definitions of fitness and propriety for accountable parties and also conflicts of interest that may arise.
  • Principle 4 - Schemes benefit from effective governance and monitoring through their full lifecycle.

    This principle looks at the ongoing governance and running of the scheme, including the internal controls and monitoring needed to ensure that the scheme continues to meet its objectives, and continues to be run with the best interests of its membership in mind.
  • Principle 5 - Schemes are well-administered with timely, accurate and comprehensive processes and records.

    This principle is informed by our previous work on record keeping, looking specifically at the administration processes required in a DC scheme.
  • Principle 6 - Communication to members is designed and delivered to ensure members are able to make informed decisions about their retirement savings.

    This includes all communications to members during their time with the scheme – from joining through to making decisions about converting their pension pot into a retirement income, including promotion of the Open Market Option.

Principles 1 to 3 are all relevant at scheme set up and therefore are most relevant to product and service providers and those advising employers on scheme selection. Principles 4 to 6 cover those activities which are likely to remain relevant through the life of a scheme and therefore could involve all parties included in scheme provision, including providers, administrators, trustees, employers and even members.

The regulator believes that if schemes follow these principles in their design, set-up and ongoing operations it will help them to deliver the six elements necessary for members to receive good outcomes, which we have previously identified:

  • Appropriate decisions with regards pension contributions.
  • Appropriate investment decisions.
  • Efficient and effective administration of DC schemes.
  • Protection of scheme assets.
  • Value for money.
  • Appropriate decisions on converting pension savings into a retirement income.

Editor's notes

  1. The Pensions Regulator is the regulator of work-based pension schemes in the UK. We have objectives to: protect members’ benefits; reduce the risk of calls on the Pension Protection Fund (PPF); and promote good administration and improve understanding of work-based pension schemes. From 2012 we will have the additional objective of maximising employers’ compliance with their duty to automatically enrol staff into a qualifying pension scheme.
  2. Our approach is risk-based, focusing on education and enablement, with enforcement where appropriate. Whilst our priority is to ensure that trustees, employers and intermediaries are well-placed to manage schemes effectively, the regulator can exercise powers where it feels it is reasonable and proportionate to do so. These powers include the ability to:
  • collect information about pension schemes: through scheme returns, under the scheme funding regime and as well as statutory (including whistleblowing) reports;
  • issue notices requiring actions to tackle non-compliance, prohibit trustees who are judged not fit and proper to carry out their duties or appoint independent trustees;
  • direct pension schemes as to how to calculate their liabilities and the contributions required;
  • issue a contribution notice (CN) where there is an attempt to avoid liabilities, or a financial support direction (FSD) where the employer is a service company or insufficiently resourced; and
  • (from 2012), issue warnings and penalties to employers for failure to enrol staff into a qualifying pension scheme.

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