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Draft DC Code of Practice

The Pensions Regulator published Code of Practice 13: Governance and administration of occupational defined contribution trust-based schemes in November 2013. Since then, there have been some significant changes in the defined contribution world, such as the introduction of a charge cap for default funds being used for auto-enrolment schemes and the far-reaching new freedoms. The Pensions Regulator has therefore published an updated draft code, which is under consultation until the end of January 2016.

It is expected that the new code will come into force in mid-2016. The Code of Practice applies to trust-based defined contribution schemes and to AVC arrangements in defined benefit schemes (if they are defined contribution in nature).

The draft code recognises that not all schemes are the same, so it is not prescriptive on the methods that trustee boards can use to meet the standards. While the code represents guidance and is not a statement of law, any failure to act in accordance with the code may mean that the trustees, or anyone else involved in running the scheme, need to be reported.

Guidance will be published to support the new code, in the same way that there is regulatory guidance in place for the current code.

Through the new code, the Pensions Regulator is aiming to get trustees to further improve standards of governance and administration for defined contribution schemes. Trustees will be pleased to hear that the new code is shorter than before. There are six sections, only some of which will be new to trustees:


1.  The trustee board

As trustees will already know, they should act in the best interests of all of the beneficiaries of their scheme. Trustees need to be fit and proper persons to perform their duties; they have to act with honesty and integrity. Professional trustees must have financial security and indemnity insurance. All trustees need to have the right level of knowledge and understanding (see the Pensions Regulator’s Code of Practice 7). New trustee candidates need to be vetted to check whether they are fit and proper.

Also covered is the appointment of a chair of trustees, which should have been done already and notified to the Pensions Regulator by 5 July 2015.

Most schemes need to have one or more member-nominated trustees – this is covered by Code of Practice 8.


2.  Scheme management skills

Trustees need to look after the interests of all beneficiaries, including deferred members and, for those schemes offering it, members who are taking advantage of the new pension freedoms. The requirement for good governance does not end when an employee stops contributing. In order to look after every beneficiary’s interests, trustees need to have the right level of knowledge and understanding, as mentioned above, and to have the skills to apply the knowledge.

Trustees should spend sufficient time on running their scheme. The time needed will vary depending on how big the scheme is and how complex the rules are.

Another area covered which trustees will already be familiar with is conflicts of interest.


3.  Administration

The Pensions Regulator describes good administration as the bedrock of a well-run DC scheme. This means that all transactions, such as the investment of contributions or of a transfer into the scheme, need to be processed accurately and in a timely fashion. For this reason, the code suggests that administration should be included on the agenda for consideration at all regular trustee meetings. Administration should also feature on the scheme’s risk register, along with record keeping standards. If they use external administrators, trustees should get regular administration reports. A business continuity plan should also be in place and reviewed annually.

The Pensions Regulator now expects electronic payments to be the norm and cheques are appropriate only in exceptional circumstances. Trustees should also consider using services and platforms to expedite the transfer of funds.

Whilst legislation sets out timescales for certain transactions, such as the investment of contributions, these are the absolute maximums. The code goes on to say that contributions and transfers are expected to be invested within three working days of the receipt and reconciliation of the amounts. Reconciliation could, in some instances, take some time to complete. Furthermore, where there are unreconciled amounts, these should be held back while the reconciled amounts are invested.


4.  Investment governance

An important factor in delivering good member outcomes is suitable investment governance. Trustees must therefore have a good grasp of investment matters, but should make investment decisions on the basis of advice received from a qualified person. Trustees particularly need to consider the default investment strategy, in addition to offering members an appropriate range of self-select options. Members need to be given sufficient information on all their options to help them make informed decisions.


5.  Value for members

The Pensions Regulator’s focus for achieving good value is on the fund charges and transaction costs that are applied to members’ investments. The Pensions Regulator accepts that transaction costs can only be examined as far as they are available. Trustees must include their assessment of value in their Chair’s Annual Statement. While there are no specific details on how to perform the assessment, the Pensions Regulator is expecting charges and transactions costs for a scheme to be compared against other investment options which are available in the market. Under the draft code, trustees should examine the demographics of their membership and potentially investigate members’ preferences when deciding whether their scheme represents good value for members.


6.  Communicating and reporting

The draft code states that good member communications are vital to ensure members are engaged and make the right decisions. Member communications should be “accurate, clear, relevant and provided in plain English”.

The code gives particular emphasis to communications at retirement. Members need to be told about all of the options available to them, not just those in the scheme and that it is possible to transfer to another scheme to access some options. The code also refers to Pension Wise and the need to carry out suitable checks to avoid pension scams.

Under the heading of reporting, the code refers to the Chair’s Annual Statement, the Statement of Investment Principles and reporting to the Pensions Regulator. The Chair’s Annual Statement needs to include a “meaningful narrative” on how governance standards have been complied with. Reporting to the Pensions Regulator is concerned with updates on registrable information and completion of the annual scheme return.


While the removal of the 31 DC quality features and the voluntary governance statement are to be welcomed, many of the quality features themselves remain, as distinct points in the draft code. The Chair’s Annual Statement, which replaces the governance statement, is however, mandatory. Moreover, it will take more time and effort to obtain further information, such as transaction costs.

It is recognised that the new requirements are more onerous, and will inevitably lead to more work for all pension arrangements, although we are concerned that sponsoring employers may feel that it is not worth continuing to run smaller pension schemes. This may tie in with a previous endorsement of larger schemes by the Pensions Regulator when they suggested that they are more likely to be able to devote the necessary time and resources to the running of the arrangement. This could be in part addressed by the provision of more guidance and information from the Pensions Regulator – in particular in relation to assessing value for members; trustees might even look to the FCA’s guidance for independent governance committees to help them assess value.

It is unlikely that there will be significant changes to the draft code before it is finalised.

The full draft code can be found at


Robin Dargie