“Sub prime crisis hits wider markets.” “Equity market falls wipe billions off the value of pension funds” – headlines like these do little to help the confidence of pension scheme members. For the large majority of people in private sector schemes, a defined contribution (DC) offering is now the main source of future pension provision. It is vital these members are given adequate protection to build confidence in the future. It is therefore timely to consider the current regulations and how schemes can best cope with these.
For trust-based schemes, the primary focus of regulation is trust law, which includes the requirement to seek expert advice. However, trustees must also take into account the occupational pension scheme regulations, the rules relating to Financial Services Authority-regulated products and the terms of the Financial Services Compensation Scheme. Additionally, trustees must be aware of the Myners principles in relation to pension scheme investment. While these remain a voluntary code of best practice, increasingly, trustees are regularly reviewing how well their scheme meets these principles.
Contract-based schemes are also subject to a number of the above regulations, but fall outside the requirements of trust law.
There is a good deal of regulation in place in relation to DC schemes. This has become somewhat less burdensome over recent years in an attempt to help companies promote their schemes more easily.
In a trust-based scheme the trustees take on the role of ensuring regulatory requirements are met. The need to take expert advice ensures, at least some extent, that the members are given protection in relation to the products offered. They can also be assured that regular monitoring of the provider’s service and performance is taking place. However, with these myriad regulations, the role of a DC trustee is perhaps not as straightforward as many people had predicted several years ago.
In contrast, within contract-based schemes, there is often a gap in true accountability for the scheme. No one has the explicit role, for example, of monitoring the investment performance of the managers. This could potentially lead to a range of funds being offered that are no longer appropriate for the members. This is one of the key reasons we have been promoting the concept of governance committees for contract-based schemes. Although the members of these will not have the same powers and responsibilities as trustees, they will form an established body responsible for the regular monitoring of the DC provider and will ensure the scheme is being run in line with regulations and best practice.
Good governance, in whatever form it takes, remains the key to coping with regulation. As companies start to look more closely at their DC schemes, the continued development of the governance structure will undoubtedly move higher up the agenda.
Colin Mayes is a senior consultant at Hymans Robertson
