TPR says publication of the high-level principles is the next step in its drive to improve standards of DC provision and ensure that the pensions sector is ready to support automatic enrolment.
The six principles span the lifecycle of a DC scheme from the design and set-up phases through to the ongoing management – including monitoring of scheme governance, accountability, scheme administration, and communications with members. They are:
Principle 1 – Schemes are designed to be durable, fair and deliver good outcomes for members. This principle covers the features necessary in a scheme to deliver good outcomes for members, including features such as the provision of a suitable default fund, transparent costs and charges, protected assets and sufficient protection for members against loss of their savings.
Principle 2 – A comprehensive scheme governance framework is established at set-up, with clear accountabilities and responsibilities agreed and made transparent. This includes identifying key activities which need to be carried out, and ensuring each of the activities has an ‘owner’ who has the necessary resources to carry out the activity.
Principle 3 – Those who are accountable for scheme decisions and activity understand their duties and are fit and proper to carry them out. This principle ensures that those who are given accountability or responsibility for a key governance task are able to carry this out. The principle will cover definitions of fitness and propriety for accountable parties and also conflicts of interest that may arise.
Principle 4 – Schemes benefit from effective governance and monitoring through their full lifecycle. This principle looks at the ongoing governance and running of the scheme, including the internal controls and monitoring needed to ensure that the scheme continues to meet its objectives, and continues to be run with the best interests of its membership in mind.
Principle 5 – Schemes are well-administered with timely, accurate and comprehensive processes and records. This principle is informed by our previous work on record keeping, looking specifically at the administration processes required in a DC scheme.
Principle 6 – Communication to members is designed and delivered to ensure members are able to make informed decisions about their retirement savings. This includes all communications to members during their time with the scheme – from joining through to making decisions about converting their pension pot into a retirement income, including promotion of the Open Market Option.
The principles build on the previously-identified six elements necessary for good member outcomes, namely appropriate decisions with regards pension contributions; appropriate investment decisions, efficient and effective administration of DC schemes, protection of scheme assets, value for money and appropriate decisions on converting pension savings into a retirement income.
Speaking at the National Association of Pension Funds Trustee Conference yesterday, TPR chief executive Bill Galvin said the regulator would work with stakeholders to develop a shared understanding of the principles, with a view to publishing further tools and guidance on the features of a good DC scheme next year.
Galvin said: “It goes without saying that all schemes should be designed and run in their members’ best interests, and be capable of delivering a good outcome. But at present DC standards are mixed with too many schemes providing poor value for money.
“We want to work with the pensions sector to establish a shared understanding of what a good DC scheme looks like – and for all schemes to be able to meet these standards. This will help employers to feel confident that they are choosing a quality scheme for their workforce, and for members to feel confident that their pension pots are safe and well-managed.”
Mercer head of DC consulting Tony Pugh says: “Everyone agrees that obtaining good outcomes for DC members is critical to the success of the auto-enrolment concept and to safeguard the future wellbeing of private sector retirees. Failure to do this is an option that we should not contemplate, as it will be disastrous for future generations of pensioners. Unfortunately many DC schemes are already faltering, partly as a result of the economic climate but possibly also because of a loss of confidence in the DC sector.”
“We all recognise that an auto-enrolment contribution of 3% from employers will not give pensioners an adequate income in retirement. The challenge lies in finding a level that is both adequate and that employers are willing and able to pay.”