The new DC code will not be finalised and implemented until July 2016 but there are steps trustees should be taking now


What happened?

The Pensions Regulator is carrying out a consultation on the new revised DC code.

The new proposed DC Code scraps the previous 31 quality features, instead focusing on 6 key areas:

  1. The trustee board – including appointing a chair of trustees, member-nominated trustees, and master trusts.
  2. Scheme management skills– such as managing risk, trustee knowledge and understanding, and conflicts of interest.
  3. Administration – including core financial transactions and record keeping.
  4. Investment governance– including documenting investment matters, monitoring and reviewing investment strategies, and security and liquidity of assets.
  5. Value for members– such as restrictions on costs and charges, and the adjustment measure.
  6. Communicating and reporting– for example at-retirement communications, scams and the annual chair’s statement.

Helen Ball, head of defined contribution at Sackers, commented: “TPR has listened to its stakeholders. The revised DC code is more user-friendly and a much more manageable size.”

However Mark Futcher, head of DC at Barnett Waddingham, has said that the independent advisory firm is concerned about the inclusion of ‘value for members’ as one of the six pillars rather than an overarching theme.

He explains: “My only concern on reading it - and we are going to respond to the formal consultation - is that there are six sections and value for money is a section in itself.

To me every single thing that contributes to DC - from the trustees to sponsoring employer and the provider, as well as all of the individual elements such as administration, engagement and communication, investment management and cost charges - all contributes to value for money.

“So value for money needs to sit above that and actually trustees need to satisfy themselves that all areas hopefully add to value but importantly there’s nothing that detracts any value.”

The Regulator has also introduced more clarity in terms of the language it uses replacing confusing terms such as ‘should’ ’could’ and ‘must’ with the more understandable ‘the regulator expects’.

The shift was welcomed by attendees of Engaged Investor’s Professional Trustee Summit event with one remarking afterwards: “this is much better, it was too confusing before. Trustees need to know what is a regulatory requirement and what is a ’nice to have’.”

What does it mean for trustees?

DC Standards (trust-based only)

1) Think outside the box

The new code means trustees will no longer have to produce governance statements due to the shift away from the 31 quality features.

However Futcher thinks it will force trustees to take a more considered approach.

He explains: “The old DC code – there was the opportunity to use it as a tick box exercise. There were 31 features which trustees needed to rate as red, amber or green and basically put a comment explaining what they are doing. I reckon every single group of trustees has convinced themselves that they were doing a good job and put something against all of those boxes.”

“You could basically argue that the statement of investment principles, regular meetings, risk register a newsletter and a statement, pretty much covered off all the tick boxes.

“I think the new draft code actually requires a lot more thought.”

2) Training is everything

The much shorter new code assumes trustees have a good level of knowledge of the relevant legislation, and articulates the standards of conduct and practice that trustees are expected to meet.

The upshot of this is that trustees will be expected to get their knowledge and understanding up to scratch.

The Regulator said on its website: “The draft revised DC code assumes that those reading it have good knowledge of the legislation which applies to their scheme, and where that is not the case we urge those trustees to undertake appropriate training, including completing the trustee toolkit, and to take professional advice.”

With the new code expected to come into force in July, ensuring that adequate training in place must be a priority for trustees in the new year.

3) Review schemes now

For any trustees who may be worried about what to do between now and when the new code is finalised, Warwick-Thompson advised that everyone should continue to follow the old code.

However advisers are suggesting that trustees start thinking about what it might mean for them in practice, as it seems unlikely that the code will change much as a result of the consultation.

Futcher explains: “I think they should definitely read the new DC code and start shaping up and thinking how that impacts their scheme. I don’t believe we’re going to see too much drastic change from the draft although we might see a bit of reordering.

“Trustees should start reviewing their schemes, start pulling on their advisers, start doing a lot more analysis in each of the areas expanding on the tick box exercises that they’ve done for the old DC code.”

What next?

Warwick-Thompson has said he expects the code and guidance to be fully implemented by July next year and most experts are expecting very little change as a result of the consultation.

While there are no plans to include information and guidance on how to meet the legal requirements in the code, these details are expected to be delivered separately in a series of ’how to’ guides, which will be consulted on in April 2016.

Sophia Singleton, partner and head of DC consulting at Aon Hewitt, said: “What trustees are looking for right now is practical support with how to complete their Chairman’s Statement, and in particular, how to assess value for members.

“This draft Code does not achieve that.

”The draft Code itself has taken a step back to cover the issues at a higher level, so I am looking for significantly more detail from the Pensions Regulator in the guidance in the spring.”

Hugh Nolan, Chief Actuary at JLT Employee Benefits, agrees that delivering this guidance must be a priority.

“Our only concern is whether the detailed guidance suggested will be available quickly enough to really help trustees who are already having to grapple with their responsibilities in the exciting new world of ‘Freedom & Choice’.

“Many trustees are unsure of how to generate the best outcomes for members in the new environment, with updated default investment strategies and guidance at retirement both absolutely key in protecting the best interests of members.”