Pensions Regulator emphasises importance of trustees in new defined contribution code

The Pensions Regulator has "deliberately moved away" from references to what trustees 'should' or 'could' do; replacing these with explicit references to what "the law requires" when trustees have a legal duty to do something, and "we expect" when describing its own standards in a draft published for consultation, according to pensions expert Helen Hanbidge of Pinsent Masons, the law firm behind Out-Law.com.

Andrew Warwick-Thompson, executive director at the regulator, said that the new code would provide "practical guidance" to trustees, scheme managers and advisers at a time of "unprecedented change" for the pensions industry.

"We know that trustees of DC schemes and any scheme offering money purchase benefits need to adapt to ensure member outcomes remain strong," he said.

"In this context, the draft revised DC code seeks to make the standards we expect from trustees as clear as possible. The guides that will support the new DC code will provide practical guidance to help trustees understand the different measures they can put in place to meet the standards in the code," he said.

The consultation runs until the end of January, and the regulator expects to finalise the code in May to come into force in July 2016. The current DC code of practice, which came into force in 2013, remains in force until then. The Pensions Regulator will also consult on a series of 'how to' guides to support the new DC code in the spring, it said.

Once in force, the new code will apply to all trust-based DC schemes with two or more members, including DC sections of mixed benefit schemes and money purchase additional voluntary contributions (AVCs) within defined benefit schemes. The document sets out how the regulator expects trustees, scheme managers and advisers to go about discharging their legal duties under pensions legislation and trust law. There are no direct penalties for non-compliance with the code, but penalties may be imposed for breaches of the underlying legal requirements.

The draft code is "shorter and simpler" than the 2013 code of practice, and has been revised to take into account new rules on scheme governance, pension flexibilities and the charge cap, according to the regulator. It is not prescriptive, and acknowledges that trustee boards "will often need to make judgement calls as to what is a reasonable and proportionate method of ensuring compliance" for their particular scheme.

The document is divided into six sections: the trustee board; scheme management skills; administration; investment governance; value for members; and communicating and reporting. It emphasises the importance of the new requirement to appoint a 'chair' of trustees and sets out the regulator's expectations of a robust appointment process. However, the code also acknowledges that trustees remain jointly accountable for running the scheme, and sets out the skills and attributes that the regulator expects all trustees to have or acquire.

"The draft code emphasises very effectively that trustees of DC schemes have a really important role to play in achieving good member outcomes," said pensions expert Helen Hanbidge. "It is a demanding job if done properly, even though the duties may differ from those of defined benefit trustees."

"The code recognises that different schemes and arrangements may need to take different approaches to DC governance and administration. It isn't prescriptive about what schemes must do, although we haven't yet seen the separate guidance. It does give a few examples to make expectations about trustee behaviour clearer, but we can expect more of these in the guidance," she said.

The regulator's treatment of trustees' legal duty to ensure core financial transactions are processed promptly and accurately in the draft code was one of the most striking examples of its approach, Hanbidge said.

"Apart from stating that legislative timescales should be treated as absolute maximums by trustees, the regulator has declined to give guidance about what timescales are appropriate," she said. "This is probably helpful as what is appropriate will vary in different schemes and different situations - although the regulator clearly expects trustees to keep their processes under regular review and to ensure sign-off processes do not delay transactions."

"There is also a lot of emphasis on value for members and member engagement, which the regulator recognises as being key to achieving good member outcomes. The regulator recognises that what constitutes good value will vary between different schemes and different membership profiles; it expects trustees to make efforts to understand the characteristics of their members and, where possible, their preferences and financial needs. Knowledge of the scheme membership profile is also highly relevant when it comes to monitoring and reviewing investment strategies and fund performance," she said.