DC pension trustees need a clear statement of their purpose, says expert

The traditional view is that the duty of defined contribution pension trustees is to administer the scheme in line with the trust deed. Their duty hasn't been seen as extending to the outcomes for scheme members. The emphasis has been on operating the trust properly, not on taking responsibility for the amount members receive when they retire.

Many in the pensions industry still hold that trustees have no duty in relation to outcomes. But in my view the current changes in the pensions market will mean this is no longer realistic. The way that defined contribution pensions are changing means that trustees will be drawn into looking at members’ prospects and trying to improve them.

And trustees can only take on this task if they have a clear understanding of the employer's aims for the scheme. For most trustees and employers, the best way to do this will be to have a clear written statement of the scheme's purpose, showing in specific terms what it is aiming to achieve for its members.

One of the changes pushing trustees towards considering outcomes is the Pension Regulator's defined contribution code of practice. Many trustees are already daunted by the process of getting advice on compliance with the code.

But there is an even bigger change on the horizon. Over the next couple of years we will see a spread of IT models that show how a scheme’s entire membership stands against the members' target replacement ratios. These IT products will act like a funding report for DC schemes.

These reports will mean that trustees can see if their scheme is underperforming. At that point it will be hard for trustees not to take up the reins in asking the employer for improvements. The improvements could be additional contributions, a better communication strategy or financial guidance to encourage employees to pay more.

I expect that some trusts will stop running at that stage. As the role of trustees gets more complex, there will be another wave of employers deciding to switch to group personal pensions, with their lower costs and management time, or to master trusts with inbuilt governance standards.

But for those schemes that take the bold decision to continue, it will be essential for trustees to articulate clearly in writing the scope of their duties. This should involve agreeing with the employer what the strategic aims of the scheme are. This will take thought and discussion, because there is a difference between the possible approaches: for example maximising retirement income, maximising the pot available at retirement or aiming for a reasonable level of saving for as many members as possible.

And not only will trustees and employers be forced into adopting a strategic statement, I would go as far as saying that the strategic statement should have the force of the scheme’s trust deed. It might not be written into the deed itself, but included in a policy statement to which the deed can cross-refer. Only by doing setting out their strategic purpose will trustees be able to judge whether they are running the scheme effectively.

This will be a big step for trustees. But there is a strong focus on how hard running a defined contribution pension scheme is – and adopting this sort of document would give DC trustees some of the support and protection that they desperately need.

Mark Baker is a pensions expert at Pinsent Masons, the law firm behind Out-Law.com