Over the past year the Pensions Regulator has started to look seriously at the governance of money purchase pension schemes. In July 2013 it produced guidance explaining the type of good quality pension schemes it expected employers to provide to their workers to comply with auto-enrolment. Then it released a set of defined contribution guidance (dealing with good practice) and a code of practice (dealing with legal compliance) in November 2013.

Continuing in this vein the Regulator has now produced a governance statement for trustees to complete, and an online tool to help employers and trustees check that their scheme meets the Regulator’s expectations: Tools to run a quality DC Scheme

What areas does the online tool cover?

The online tool covers all 31 of the Regulator’s ‘quality features’. These are the features the Regulator expects to see in a well governed defined contribution pension scheme.

The Regulator has grouped its quality features into 6 categories as follows (we have added an example by each to give a flavour of these):

  • Know your scheme: “Trustees will regularly review their skills and competencies to demonstrate they understand their duties and are fit and proper to carry them out”
  • Investment:  “Trustees will ensure that investment objectives for each investment option are identified and documented in order for them to be regularly monitored”
  • Risk Management: “Trustees will establish and maintain adequate internal controls which mitigate significant operational, financial, regulatory and compliance risks”
  • Governance: “Trustees will ensure that all members receive value for money”
  • Administration: “Trustees will ensure that member data across all membership categories is complete and accurate and is subject to regular data evaluation”
  • Member communications: “Trustees will ensure that scheme communication is accurate, clear, understandable and engaging and it addresses the needs of members from joining to retirement.”

Trustees are expected to assess their scheme against each quality feature, including by reference to a colour coding. Imperial purple shows the scheme meets best practice as set out in the Regulator’s defined contribution guidance. Red shows the scheme does not meet the requirement and has no plans to do so. Complying with the statutory requirements and the code of practice will entitle a green rating. Amber indicates that a plan is in place to meet the requirements by a specified date.

Trustees need to provide an explanation of why they believe they are at their current position. If they are not fully compliant in any area they will need to say how they plan to improve. Trustees will also need to show where they were at their last review and specify when they next plan to review their scheme status.

Where a feature is missing or only partially met, trustees can expect to be asked by the Regulator to explain why there is an issue, and what they are doing about it.

In short, the tool is a useful thought provoking exercise for trustees when considering whether they are meeting their basic legal requirements. Trustees will then need to decide how to take the extra step to meet the Regulator’s best practice of providing the best possible scheme for members.

Can I just ignore the tool and the governance statement?

Trustees have to provide the Regulator with an annual governance statement. They cannot ignore that obligation.

Trustees do not have to assess their governance compliance using the assessment tool and could use an ‘in house’ tool if they wish. However, unless trustees have already developed, or have access to, an alternative which they believe is better and assesses (at least) the 31 quality points, we suggest there is little benefit to using a different approach.

What about contract based pension schemes?

The checklist is not directly relevant to contract based pension schemes such as group personal pension plans.

However the Regulator’s broader remit does extend to these schemes in certain areas. As an example, the Regulator has produced a set of principles for investment governance which apply to both trust and contract based schemes.

You can find these here Principles for investment governance of work-based DC pension schemes.
These include a template for a governance plan setting out the areas where the Regulator expects to see a clear division of responsibility between employers, providers and other advisors. Employers with contract based schemes should take a look at this document and consider how their scheme meets each point in the template. Employers and providers will also need to be aware of the Financial Conduct Authority guidance.

What actions do trustees of defined contribution schemes need to take?

As noted above, trustees will need to run their scheme processes and structures against the checklist and then submit a governance statement to the Regulator. They should do this at the earliest opportunity to make sure that any changes to their existing procedures are made as soon as possible. This will avoid having to explain to the Regulator that the only reason they are non compliant is that they did not make the time to comply.


The Regulators new requirements will force many trustees to ‘up their game’ with regard to their defined contribution schemes.

The aim of the Regulator is laudable. Our main observation is to question whether it is helpful to have so many separate documents for trustees and employers to keep track of when reviewing their schemes.

Using a favourite word of the Regulator, we suggest that it would be ‘proportionate’ for the Regulator to conduct a consolidation exercise of its guidance and legal codes into one helpful document. From our experience a similar approach with auto-enrolment has paid dividends in terms of clients being aware of, and having read, the guidance in question.

Source: Mondaq