Parts of the defined contribution market can occasionally feel like the Wild West of the pensions landscape compared to the richer, stable but declining territories of defined benefit provision. The DC authorities are forever putting up ‘WANTED’ posters in an effort to track down pension “liberation” fraudsters and providers charging extortionate fees, but caught between two law enforcers, the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR), the residents of these badlands have often found themselves overlooked by both.
The outlook for defined contribution members looked somewhat brighter this week however, with Sheriff TPR stepping in to lay down the law in the form of a Code of Practice and Regulatory Guidance. The code marks a real turning point for the treatment of DC provision. For too long it has been the (very) poor relation of defined benefit, despite being where most people in the private sector find themselves today. With auto-enrolment vacuuming up ever-greater numbers of workers, DC will, in the not too distant future, become the mainstay of the UK pensions system.
The document reflects the regulator’s six DC principles, which are underpinned by 31 DC quality features that detail the activities, behaviours and control processes that the regulator expects. The watchdog naturally wants to see good member outcomes, arguing that trustees should be able to demonstrate to their members that they have a “good” scheme and to voluntarily disclose any potential inconsistencies with the quality features. As previously stated, it also wants trustees to produce governance statements and to make these available to the members and the employer. Unsurprisingly, cost-effectiveness is also given a billing.
It is important to note that many schemes will already meet the majority of code’s requirements, but it is almost inevitable that changes will have to be made to ensure they meet the new standards.
The code is undoubtedly a great leap forward for good DC pension provision and the regulator should be applauded for its attempt to clean up the DC badlands. It is also good to see that the regulator is taking the code seriously, warning that schemes which fall short of these standards should expect some difficult questions, while continued failure to comply could result in TPR serving improvement notices against the offending schemes and/or fines of up to £50,000 in respect of breaches of the underlying legislation.
DC schemes may take a while to develop to their full potential, but the new code and guidance will act as a good catalyst to facilitate this, setting the framework upon which good investment and member understanding can grow into meaningful retirement income. With these pieces in place, this might be the beginning of a golden age of DC provision.
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