Spotlight on small Defined Contribution Schemes: How do we solve the DC governance issue?

The Pensions Regulator (TPR) has a very succinct answer to this question – ‘improve or leave the market’.

The results from TPR’s 2019 annual defined contribution survey report shows that just 4% of micro schemes with between two and 11 members and 1% of small schemes with between 12 and 99 members are meeting all of the key governance requirements.

Despite TPR’s best efforts to raise standards of governance (its 21st Century Trusteeship campaign ran over 10 months, covering 10 key governance topics), evidence shows that many small schemes have failed to take any action, with some trustees wrongly thinking that the governance standards don’t apply to them because they are too small!

TPR is  increasingly taking action where it finds that schemes are non-compliant. Figures from the latest Annual Report show that in 2018-2019, TPR issued 286 mandatory penalty notices for Chair’s Statement failures.  

Increase in governance…

In the six years or so that I was involved in running a DC trust based scheme, what struck me most was the increase in time (mine, the administrators and the advisers) needed to effectively run the scheme. A considerable amount of time was spent on ensuring compliance with TPR’s codes of practice and guidance, ‘assessing value for members’, preparing for and drafting the annual Chair’s Statement, reviewing the investment options, engaging with members and reporting to TPR. 

This is a theme that is set to continue with the introduction of more governance requirements, including the requirement to publish the Statement of Investment Principles for the default arrangement and extracts from the Chair’s Statement online for members to access.

Given that members bear the risk in a DC arrangement, and the fact that nearly all future accrual is now on a DC basis, it’s not hard to understand why increasingly greater governance is expected from those running DC schemes. 

How can small schemes improve? 

It is essential that employers providing DC arrangements understand the importance of meeting the governance requirements and appreciate the amount of resource required to effectively run a DC scheme.

The first step is to review the governance of your scheme and identify any gaps/areas for improvement. An assessment can then be made of the amount of resource (time and money) needed to fill any gaps.  

If the conclusion is that the cost (time and money) of raising the standards is too great, consideration should be given to winding up the scheme.

Leaving the market? 

Consolidation is the buzzword!

The Department for Work and Pensions and TPR are actively encouraging small schemes to leave the market by consolidating.

The DWP is currently consulting on introducing a new requirement for trustees to have to assess whether their scheme should continue or  consolidate into another scheme.

Proposals include requiring some, or all, smaller DC schemes to conduct a triennial assessment of whether their members’ may receive better value if the scheme was wound up and consolidated into a larger scheme with more scale.  

So, what are the options?

Trustees and employers of DC schemes might wish to consider the following options:  

Transfer to a Master trust for active and deferred members (non- consent transfer)

Transfer to a Section 32 Trustee Buy Out Plan for deferred members (non- consent transfer)

Transfer to a Group Personal Pension for active members (with consent)  

The expectation is that most schemes looking to leave the market will consolidate into one of the many master trusts in the market. At the time of writing there were 34 authorised master trusts.  

As mentioned, TPR and the DWP are actively promoting consolidation and some schemes will find themselves in the fortunate position of having a number of options to choose from. However, very small schemes with only a handful of members are likely to find themselves with a more limited range of options as many of the master trusts will not accept transfers of only a few members with no future contributions.

Conclusion

Small DC schemes remain in the spotlight as TPR continues to explore ways to tackle poor levels of governance. We are supportive of TPRs efforts to raise governance as good governance leads to better member outcomes. Those responsible for running small DC schemes need to take action sooner rather than later to ‘improve’ or ‘leave the market’.  

As a professional trustee we have worked with lots of small DC schemes to help them improve governance or wind up (where appropriate). We would be happy to share our experiences with you.

Please contact your usual Dalriada contact for more information.  

Sara Fisher
Sara Fisher

Sara has 14 years’ experience in the pensions industry and began her career as a pensions lawyer in private practice.