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The opdu Report - Issue 22, May 2007 Comment The Pensions Regulator chief executive Tony Hobman outlines recent work on DC and governance and explains the regulator’s approach. As a regulator, we take a pragmatic view of governance. We recognise the vital role played by trustees and the importance of good governance: in fact, our medium term strategy document specifically identifies improving the governance of work-based pension schemes as one of our three key regulatory challenges. Our approach is primarily to provide guidance and support in the achievement of this goal. Of course, the concept of pension scheme governance is not new. There have been a number of governance-related legal requirements for many years (for example, relating to member-nominated trustees). Nevertheless, the pensions world is changing. We sought the views of the industry on the regulation of DC schemes through a formal consultation earlier in the year. Our aim in doing so was to gain comment on how we propose to regulate DC schemes, and highlight what we considered the main risks to scheme members. We are currently considering the responses and will publish guidance in due course. We have also published a separate discussion paper on pension scheme governance, inviting comment from the pensions community. This paper highlights the pivotal role of education and the importance of good governance in running all schemes. Key themes relating to Defined Benefit (DB) schemes are managing conflict, the employer covenant and relations with advisers. Issues around administration, investment choices and winding-up relate to all schemes and these issues will also be highlighted in the DC guidance. Our approach to both DC regulation and governance is to educate, enable, and then enforce – supporting schemes is our priority, alongside partnership working. The emphasis is firmly on the ‘educate’ and ‘enable’ aspects, intervention will be only as a last resort. DC matters: reducing risks for members With the dramatic shift in recent years from DB to DC schemes, together with the subsequent growth of contract-based DC schemes, DC regulation has assumed ever greater importance. This has brought new challenges for many trustees. In this changing environment, it makes perfect sense for the regulator to focus clearly on the issue of scheme governance and risk. In our consultation document we identified five principle areas of risk:
The overarching risk is that trustees, employers, providers, administrators and payroll providers fail to understand the complexities and risks involved in providing and running DC schemes, or fail to give DC risks the attention they deserve. More than 40 responses to the DC consultation were received and the industry feedback was largely supportive of this view. The consultation document on DC risk did not propose new regulation – rather set out how the regulator proposes to regulate DC schemes, one of its statutory objectives. This applies to all work-based DC schemes, both trust-based and contract-based. The importance of good governance: hearing from the industry Good governance means better administration, greater awareness of risks and more effective representation of members’ interests. Our most recent annual governance survey showed that the quality of current governance is good overall, but that standards are variable. The survey highlighted the importance of training, risk management and enhanced support for smaller schemes. We believe that good governance is achieved through increased levels of knowledge and understanding on the part of scheme trustees and administrators – not through extra levels of regulation. So we will continue to monitor standards, provide targeted education and guidance, and work in partnership with the industry. Our discussion paper on governance highlights the key areas in which we aim to promote good practice:
Looking forward: a consultative, evidence-based approach Good governance is at the heart of a well run pension scheme. The regulator has already done much work on encouraging good governance, including the development of free online learning and the introduction of codes of practice and guidance. We continue to work in partnership with government and regulatory organisations, industry bodies and the pensions community as a whole. Although our discussion paper on governance is aimed primarily at trustees and advisers of trust-based pension schemes, we recognise the growing use of contract-based arrangements, and the document also considers the application of the above priorities to contract-based schemes, and the potentially greater governance role for providers and employers. For example, employers may wish to set up ‘management committees’, on a voluntary basis, to take a greater role in monitoring the contract-based scheme which they have selected, and we will provide guidance, with a discussion of possible legal risks and benefits, on setting up such committees. The underlying intention of our discussion paper is not to propose new areas of regulation but to promote high standards and share good practice. We do not aim to increase schemes’ regulatory burden or costs. In fact, getting governance wrong can be very expensive - we believe that good governance generally leads to a reduction in risks and potentially lower costs. Finding out more
Tony Hobman
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