DC Governance update



You may recall that last year draft regulations were issued setting out a number of new governance requirements for DC schemes (or DC benefits in hybrid schemes). The final version of these regulations has now been laid before Parliament so trustees can start to identify what steps they will need to take to comply with the new requirements.

From April 2015, trustees of occupational DC schemes will be subject to minimum quality standards which will require them to, among other things, ensure that:

  • default investment strategies are designed in members’ interests and regularly reviewed;
  • core scheme financial transactions are processed promptly and accurately;
  • scheme rules do not restrict the trustees’ appointment of advisors and administrators;
  • trustees assess the levels of charges borne by members and the investment costs;
  • trustees have, or have access to, all of the knowledge and competencies necessary to properly run their scheme; and
  • the scheme has a chair of trustees with responsibility for preparing a statement setting out how the scheme has complied with these governance requirements.

There had been some concern about how the requirement for trustees to appoint a chair would fit with schemes that already have a chair in place appointed by the employer. Would there have to be a separate trustee appointed chair for the purposes of preparing the DC Governance statement? This issue has been revised in the final regulations which confirm that the trustees will only need to appoint a chair where there is not already a chair in place.

Another key provision in the regulations is a charging cap of 0.75% on default funds in schemes which are qualifying schemes for auto-enrolment purposes. The cap will apply to management charges and exclude transaction costs (although this may change). One potential problem identified with this provision was the possibility it could apply to AVC funds in DB schemes used for auto-enrolment. The revised regulations confirm that where a member’s only contributions to a fund within the scheme are AVCs, they will not be counted towards determining whether that fund is a default fund.

The regulations also contain provisions in relation to the governance of master trusts.

In a separate statement, the Pensions Regulator has said that it will be publishing an essential guide to the changes later this month, and follow this up with more detailed guidance once the regulations have come into force.

FCA Rules for independent governance committees

The FCA has also published the final version of its rules for independent governance committees (IGCs) together with feedback on consultation.

All FCA-authorised provider firms operating workplace personal pension schemes will be required to set up and maintain an IGC that will have to act in the interests of active and deferred members.

IGCs will need to have at least 5 members, the majority of whom (including the chair) will need to be independent of the firm. A quorum must comprise a minimum of two independent members and must have a majority of independent members. There is detailed guidance on what constitutes “independence” for these purposes and firms should review on a regular basis whether independent IGC members continue to be independent and take appropriate action if they consider that they are not.

The key duties of an IGC will be to:

  • act in the interests of members;
  • assess the value for money of the scheme (comparing the cost with the benefits and services it provides);
  • where the IGC finds problems with value for money, to raise concerns (as it sees fit) with the firm’s board;
  • raise concerns to the FCA, alert relevant scheme members and employers, and make its concerns public, and
  • produce an annual report of its findings.

The new rules will come into force on 6 April 2015 and firms will be expected to comply with them from that date.

The response to consultation on the DC Governance Regulations is available here and the regulations themselves are here.

The Regulator’s statement is here.

The FCA final rules and feedback on the IGC consultation are here.