The pace of change in the pensions space has been little short of astonishing in recent years. This has left some employers struggling to keep their pension policy compliant, while also maintaining best practice and good governance.
If you read nothing else, read this…
- A pensions governance policy is key to ensuring employers comply with their workplace pension duties.
- A governance policy can cover scheme administration, contribution payments, communications and legal issues.
- Employers should review a governance policy to make sure a scheme provides the best outcomes for members.
In January, for example, The Pensions Regulator (TPR) announced that it had fined 169 employers by the end of 2014 for failing to comply with their workplace pension duties.
According to research by pensions law firm Sackers, published in November 2014, more than two-thirds (69%) of pension schemes have not carried out a value-for-money assessment, a standard set by TPR’s defined contribution (DC) code of practice.
But with so many different requirements set out by the Department for Work and Pensions, the Financial Conduct Authority (FCA) and TPR, it is important for employers to understand exactly what compliance and good governance looks like. This could mean looking into many aspects of providing a pension scheme: making sure schemes are well administered, paying contributions on time, setting the required communications to members to ensure they make informed decisions about their retirement savings and keeping schemes on the right side of the law.
Richard Butcher, managing director of Pitmans Trustees, says: “Governance is fundamentally about two things. One is doing the right things at the right time and in the right way, and that is all the basics from not missing deadlines to making sure that it is compliant with law.
“Secondly, it is about setting strategic objectives and setting a plan to execute to make sure the scheme is going in the right direction of strategic governance.”
Reviewing a governance policy
While good governance is a key issue for any employer, trustee or HR and pensions manager, it can be tricky to keep on top of at all times. Reviewing a policy is vital to ensure standards are met and members are receiving the outcomes they need from their pension scheme.
When reviewing scheme governance, good practice begins with an audit, which can help assess if the current structure is working.
This could highlight if scheme deeds are up to date, whether the member communications are correct, if internal controls are correct to ensure that a scheme is administered and managed in accordance with the scheme rules and legal requirements, whether the investment strategy works and if contributions are paid correctly.
Simon Riviere, scheme manager at PS Independent Trustees, says: “For trustees, a review should be done at all meetings and provide reports on the pensions scheme. But across DC, employers or governance committees can review it to see how it can be improved to make the scheme more cost effective to lead to better governance.”
Governance best practice
To help organisations assess best practice and to help schemes with the task of rectifying problems in governance, TPR published its DC code of practice and regulatory guidance, Principles and features for good-quality pension schemes , in November 2013.
The advice, which is aimed at trust-based DC schemes, but can also apply to contract-based plans, sets out six principles and 31 quality features that, if followed, can help improve pension scheme member outcomes.
“They do help, up to a point,” says Pitmans Trustee’s Butcher. “They give a code-of-practice framework within which to operate clearly in the eyes of the regulator.”
Barry Mack, partner and head of governance at Hymans Robertson, adds: “Trustees will have certain things to do and will use the codes of practice as a good step guide and they will have committees to manage good governance. But that should not stop contract-based schemes from having their own committees and they can go through these steps themselves.”
Peel Ports Group is a good example (see case study, below). The organisation launched its own governance committee made up of its pensions manager and a team member from both HR and finance. It has quarterly meetings to review governance and has input from its pension scheme provider Aegon, as well as its consultancy Aon Hewitt.
Amending a governance strategy
In some cases, employers, trustees or governance committees will identify a problem with scheme governance, which can then be rectified. To tweak a strategy and amend, committee meetings should follow up what has been highlighted. For example, if the investment strategy is underperforming it can be replaced and if the scheme charges are too high they can be re-negotiated.
But the biggest trigger for poor scheme governance is administration, says Andy Seed, head of UK DC sales at JP Morgan Asset Management. “Whether [it’s] the service provider, consultant or whoever is looking after the admin, [this] can be the biggest trigger for failure. Organisations don’t want to do more work for themselves and make the pensions manager do more than he or she has to.”
Technology and the introduction of independent governance committees (IGCs) for workplace personal pension schemes from April 2015, as announced in the FCA’s final rules in February, will help change the face of good governance in pension schemes and define better value for money.
Helen Ball, a partner at Sackers, says: “The FCA has recognised that there is no reason for voluntary arrangements to change if organisations have them.
“IGCs are looking at things at a high level and will make sure all schemes operate good governance.”
Viewpoint: Nicola Davis, Ashurst
As a result of auto-enrolment, increasing numbers of individuals are being enrolled into defined contribution (DC) pension arrangements and although governance of these arrangements is not yet legislated, it is an increasing focus for the Department for Work and Pensions (DWP), The Pensions Regulator (TPR) and the Financial Conduct Authority (FCA) and should be best practice for any forward-thinking employer.
Most employees auto-enrolled into a pension scheme will not have made active choices and will not be engaged with the pension scheme. It is important they are investing their money in well-designed, efficiently monitored schemes, where appropriate decisions are made in their interest.
In addition to any internal governance by the employer, from this April minimum standards are being introduced for contract-based schemes, where providers of workplace personal pensions will need to establish independent governance committees (IGCs).
The aim of the IGC is to act in the interest of pension scheme members to ensure they receive value for money, and to raise any concerns about the scheme. As the name would suggest, they will operate independently of the provider, meaning that they can assess schemes without influence.
Ashurst established an internal pensions monitoring committee (PMC) for our contract-based DC arrangement in 2013. Pension decisions remain the responsibility of the employee and while there are currently no statutory obligations for formal monitoring the PMC aims to follow best-practice guidelines to ensure the scheme remains an effective tool for our employees to use in their own retirement planning, and to add an extra layer of comfort for scheme members.
The PMC meets twice a year with a remit to: identify and monitor important trends from scheme information/benchmark data and consider any appropriate actions; review the scheme provider and scheme adviser(s) performance, especially against any service-level agreements; monitor the investment options available to members especially with regards to ensuring the default fund remains fit for purpose; monitor internal controls ensuring statutory requirements are considered and acted on as appropriate; and communicate important issues to members with regular reports through our e-newsletter.
As a result of establishing the PMC, we have seen an increase in the number of employees participating in the scheme, greater levels of engagement (as an example, through increased completion of expression of wish forms) and attendance at our pension clinics.
Nicola Davis is pensions and benefits specialist at Ashurst.
Case study: Peel Ports Group creates its own governance committee
Peel Ports Group launched its own pension governance committee two years ago to help oversee and support good governance for its stakeholder pension scheme.
The committee holds quarterly meetings that include input from its pension scheme provider Aegon, as well as its consultancy Aon Hewitt.
There are regular items on the agenda that include ensuring the scheme is run effectively, investment management, administration and scheme performance.
It measures all elements of good governance against a score card.
Amanda Willis, pensions manager at Peel Ports and a member of the governance committee, says: “When I came on board, I felt from an organisation’s point of view that the scheme should be well governed.
“It is not a trust-based scheme; however, we felt we wanted to put something in place to ensure members get a good service from their provider and from us as an employer. It was agreed to put the governance committee in place and it has gradually evolved.”
The committee has helped the organisation improve its scheme take-up, and managed to get previously non-enrolled employees to opt in at higher contribution rates. Of its 1,100 employees, 90% are in the scheme.
A number of changes have been made by the governance committee following the government pension reforms and the need to improve member communication following auto-enrolment.
During auto-enrolment, the committee decided to hold compulsory presentations for staff about what was happening to the scheme. In addition, it sent out newsletters and booklets and put up posters.
“We had to find a way to tell members that we made a decision to raise contribution rates, and tell all employees about auto-enrolment. Making presentations compulsory to attend was one of those decisions that was made by the committee.”
In January 2014, the organisation increased its matched contributions rates from between 3% and 6% of basic salary to between 3% and 10%.
Throughout 2014, the committee also reviewed the scheme’s annual management charge, which it agreed with Aegon to keep at a rate of 0.35%. It is currently assessing what it will offer members following the Budget changes that are due to come into effect from 6 April.
In the future, the committee, which has three members including Willis, a team member from HR and finance, will expand to six members.
Willis adds: “Our governance committee makes sure what’s happening should be happening. Following the Budget announcement, we have looked at a number of things, including introducing another couple of default funds, allowing employees to take cash lump sums and income drawdown, but it is about making sure the committee communicates this correctly.
“But what will be important in the future is to get three employee representatives on board to allow the committee to have a wider view of the workforce, to help give confidence to all staff that their savings and contributions will be valuable at the end.”