Equiniti assess the new Pensions Code of Practice 13
Thu 21st July 2016
By Peter Scott, Head of Pension Regulation and Compliance, Equiniti – Pension Solutions
When the terrain is changing, it’s handy to have a guide. Trustees of Defined Contribution pension schemes are about to get a whole set of guides to help navigate through the revamped Code of Practice 13 that comes into force imminently.
The pensions landscape has been transformed by the introduction of auto-enrolment in 2012. Within two years the numbers saving into DC schemes tripled to more than 3 million, for the first time surpassing active membership of defined benefit schemes, with further growth expected as the auto-enrolment net extends across smaller employers.
As DC assumes ever greater social and economic importance it is no surprise that The Pensions Regulator is stepping up its scrutiny and wants to ensure the regulatory environment remains fit for purpose. At its introduction in November 2013, the original code – full name Code of Practice 13: Governance and administration of occupational defined contribution trust-based schemes – was designed to help trustees comply with their legal responsibilities but was short on detail.
The new structure should help keep regulation up to date as amendments to the guides, unlike to the code itself, would not have to first be laid before Parliament.
While offering practical information and highlighting factors that should be considered, the guides do recognise the individuality of schemes so are not exhaustive or prescriptive. The regulator plans to publish additional tools such as checklists and summaries to support the guides, and to adjust its online tool to help trustees assess their scheme against the standards of conduct of practice.
Overall the reaction to the revised code and guides has been generally supportive. The guides, to a large extent, are a restatement of the existing code, guidance and regulation. But they do provide a degree of much needed detail although this appears biased towards larger schemes with deeper pockets.
Certainly more could be done to clarify the position of small schemes and money purchase AVC arrangements within defined benefit schemes. Each guide states that smaller/AVC schemes should apply a “proportionate approach to meeting the relevant standards” but there is little in the way of specifics of what might be regarded as proportionate. Effectively the least guidance is being given to schemes that have fewer resources to check they are complying and the most to lose if they do make mistakes.
The focus on electronic transfer of data described in the ‘administration’ guide raises similar issues. There is now huge pressure on schemes to use electronic platforms to speed up transactions such as transfers. While electronic data transfer may be cost-effective for larger trust-based schemes, it may be uneconomic for smaller schemes using slower, manual processes. Similarly, in the ‘value for members’ guide, there is no recognition that smaller schemes may be more reliant on external professional advisers resulting in extra costs being born across a smaller membership.
From being ‘regulation lite’ just a couple of decades ago, the standards that trust-based DC schemes must meet are now far more onerous. That’s not surprising when you consider there is more at stake than ever before. Higher standards should benefit members, but also come with higher costs. Our view is that the more detail on processes and procedures given in the guides, the easier it will be for schemes to comply because they won’t have to spend time and money interpreting how the rules apply in their circumstances. A useful development, therefore, could be a ‘supplement’ to the guides specifically covering the requirements of small scheme.
As they stand, the changes are likely to add momentum to the mastertrust juggernaut at the expense of single employer schemes. Mastertrusts tick all the compliance boxes but lose out in terms of what could be called “local knowledge” – the unique ethos of the sponsoring employer and the bond it has with each member. In future, will running your own scheme still be worth the bother?
Of more immediate concern is that the new code is likely to signal a more active approach from the regulator. After the original code was introduced there was surprisingly little in the way of auditing but there are signs the watchdog is toughening up. In recent days it issued its first fine on the trustee of a pension scheme for failing to prepare an annual governance statement, one of the statutory requirements that came into force last year and which will markedly increase the amount of scheme information that trustees need to gather and report.