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New 'how to' guides will help DC pension trustees comply with their legal duties, says expert

A series of 'how to' guides for trustees of defined contribution (DC) pension schemes will be essential reading once finalised, as they will help trustees comply with their legal duties, an expert has said.18 Apr 2016

The draft guides are intended to accompany the new, shorter DC code of practice from the Pensions Regulator, which is due to come into force in July. The regulator has published six guides for consultation, each covering one of the six basic governance topics covered in the code of practice: the trustee board, scheme management skills, administration, investment governance, value for members, and communicating and reporting.

"Following the guides is a means of protecting members and trustees alike," said pensions law expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com. "They will help trustees to apply existing trust law duties - to act in members' interests - to DC schemes."

"There is some very granular stuff in the guides, but many trustees still need to focus on the bigger picture: bedding down their default fund design; getting member communications right; at-retirement processes; and working with the employer on the strategic purpose of the scheme. And there are still some important areas which don't get the attention they deserve, such as asset security and supply contracts," he said.

Barton said that the Pensions Regulator had noted in the guides that it was "difficult to assess the level of asset security associated with a particular investment".

"This shouldn't stop trustees considering this and communicating to members in this respect," he said.

"The guides also reaffirm the idea of having a comprehensive contract in place with third party suppliers to discharge statutory risk control requirements. This is particularly important in relation to any supplier holding either of member assets or member data. Both represent risks to member outcomes if things go wrong – and complaint hot spots for trustees in the future," he said.

The new guides and the code of practice to which they refer will apply to all occupational schemes with some DC savings accounts. This means that they not only cover 'pure' DC schemes but also hybrid schemes, including mixed benefit schemes and money purchase additional voluntary contributions (AVCs) within defined benefit schemes.

The guides recognise that trustees' actions will depend on the nature of the particular scheme and its membership. For example, they state that a "proportionate approach" to compliance will be adopted by the regulator where the scheme's only money purchase benefits are AVCs and the majority of member benefits are guaranteed by the sponsoring employer. However, the drafts do not provide any examples showing what this proportionate approach might look like in practice.

Like the new code of practice, the guides also take account of the new rules on scheme governance, pension flexibilities and the cap on member-borne charges that came into force in April 2015. Although there are no direct penalties for non-compliance with either the code itself or the guides, penalties can be imposed for breaches of the underlying legal requirements set out in new and existing pensions legislation and trust law.

The consultation on the draft guides closes on 11 May 2016, with final versions of both the guides and the new code of practice expected to be published to come into force in July. The Pensions Regulator also intends to supplement the guides with checklists and summaries, and to update its existing scheme assessment template in due course.