Comply with new pension scheme governance rules or risk fines, says regulator

It has written to trustees to remind them of their duties, and to publicise new guidance it has published to help them comply with the requirements. These include the need for trustees to appoint a chair, and new charge controls for schemes used as automatic enrolment 'qualifying schemes'.

Pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, said that although the new governance standards had been in place since April there was still "a low level of awareness and understanding in many quarters".

"Trustees need to be careful in this respect because they have legal responsibility to make sure governance standards are adhered to – and can face regulatory action if they don't get this right," he said.

"Trustees should make sure that they know the scheme deadline for reporting to members on the new governance requirements and take the matter seriously. Reporting to members on governance lapses could be a confession of breach with unwelcome legal consequences," he said.

The first trustee board chairs should have been appointed by 5 July 2015. The chair's responsibilities include signing the chair's annual statement, which is a document that details how the trustees have met the new governance standards. These standards, which came into force on 6 April, require trustees to design the scheme's default investment arrangements in members' interests and keep these, and the value of transaction costs and charges borne by scheme members, under regular review.

"Where once there was guidance on a voluntary value for money framework, there is now a highly prescriptive legal framework for the charge cap on administrative costs," said Barton. "There is also a formal legal requirement to assess and report on value for money of the scheme and the benefits it provides."

"There are a few layers to this assessment which can essentially be summarised as identifying the charges of the scheme relative to the benefits it provides; comparing and benchmarking against the market; and determining what members actually value. Without going through these steps, trustees will find it very difficult to stand behind a value for money assessment," he said.

Since April, member-borne charges excluding transaction costs have been capped at 0.75% of the value of funds under management for DC schemes used for automatic enrolment. schemes that are not currently able to comply with this cap can apply to the Regulator to use an 'adjustment measure', as a kind of temporary fix. However, the deadline for using this measure is 6 October unless exceptional circumstances apply, according to the regulator's announcement.

The new legislative requirements supplement, rather than replace, the existing governance framework for DC schemes described in the regulator's DC Code of Practice. Barton was at pains to remind trustees that the code iss "effectively a manual as to how trustees need to discharge their legal duties in relation to DC schemes".

"Two elements of the code are often neglected: the requirement for a comprehensive contract with third party suppliers; and understanding whether and how the Financial Services Compensation Scheme applies and communicating this to members," said Barton. "The point is to make sure that contracts are in place that protect members, where suppliers hold either members' data or members' money."

"It may well be too much for some trustees and prompt thoughts of closure of the DC scheme or section, and transition of the members and their money to a scheme provided by a third party. When handing over responsibility to a new third party provider, trustees will need to make sure that they do so in a way which protects members – and which protects trustees too," he said.