DC pension schemes can learn governance lessons from DB

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A committee should be at the heart of a robust pensions governance structure.
Governance committees should consider appropriate investment fund options and default strategies.
Scheme members should be given clear and relevant communications.

The defined contribution (DC) pension plan has become the scheme of choice for many employers. But how can organisations ensure their governance structures are fit for purpose, and is there anything they can learn from the defined benefit (DB) world?

Sean Gilfeather, head of actuarial and risk management at Lorica Employee Benefits, says: “In a world where DC is replacing DB, governance is important because employees have a lot more risk. So there are a lot of features from a DB governance framework that can be transferred across, such as the basic principles of governance: making sure the administrators are working properly, doing their jobs and meeting the service-level agreement.”

At the heart of a robust governance structure should be a committee. This should map out clear roles and responsibilities for its members, who should include a range of the organisation’s decision-makers, including members of the HR and finance teams, as well as employee representatives.

Specialist governance committees should also be established, comprising trustees and stakeholders with adequate knowledge and experience of DC pension schemes.

Lauren Juliff, head of DC business development at Schroders, says: “In the past, trustee boards have focused, understandably, on the larger problem being DB and, because of lack of time and experience with DC schemes, many have identified easy solutions requiring little governance, such as passive equity lifestyling.

“We are really starting to see that change now. Trustees are learning from the DB model and are establishing DC committees and specialist boards, communications committees, and setting more time aside for DC schemes.”

Protecting members’ interests

The value of a DC scheme member’s pension is based on their investment choices and not on their final salary, as is the case with DB schemes. This means governance structures must ensure members’ interests are protected through appropriate investment fund selection and monitoring fund performance.

Richard Wilson, senior policy adviser at the National Association of Pension Funds, says: “As with DB, DC schemes need good governance. The difference is that people have choice.”

Mark Hodgkinson, director at Muse Advisory, adds: “That means thinking about what the [retirements savings] outcome should be, working back through all the key steps of contributing, saving, investing and educating.”

Default fund selection is therefore an important consideration for employers. Governance committees should decide on the suitability of a default option for members, oversee fund design, monitor performance and communicate information about the fund to scheme members.

Committees must also consider how members will convert their pension pots at retirement. Hodgkinson adds: “Developments in the annuity market mean there could be big differences in the pension quota to people in all sort of circumstances. Proper guidance at that point would have much more value.”

Communications with staff should use plain language to outline investment objectives and signposts, setting out all retirement options.

PRINCIPLES FOR DC INVESTMENT GOVERNANCE

Stage 1: Governance structure: