Articles - New rules for small schemes


Has anyone else found themselves getting annoyed by people who break the rules relating to COVID-19, even if in that given scenario they don’t make any difference? In the early days it might have been someone wandering the wrong way down an empty supermarket aisle. Some days I leave my car in a ‘COVID-secure’ car park, and I find that if even one driver parks their car poorly by using up extra space, it puts everyone’s parking out of kilter.

 By Dale Critchley, Policy Manager at Aviva
 
 But it doesn’t really matter as other people will just have to find ways to fit into the available space, so why do I notice it? I think after living under 7 months of rules, I’m just conditioned to follow them.

 To encourage smaller pension schemes to follow the rules around pension scheme governance, the Department of Work and Pensions (DWP) is consulting on “Improving outcomes for members of defined contribution pension schemes”. The consultation closes on 30 October, so I’ll ensure I submit a response by that date. Rules are rules!

 The DWP is trying to address the issue that trustees of smaller schemes haven’t been very good at following the rules, as laid out by the Pensions Regulator (TPR) in their Codes of Practice.

 The latest report from TPR showed that the majority of small schemes failed to meet its key governance requirements.

 Less than half of schemes with 1000 or more members carried out an effective assessment of value for money. For schemes with fewer than 100 members, the numbers fall to around 10% of trustee boards. It’s a similar story with all four key governance requirements. This has implications for members as poorly governed pension schemes have the potential to deliver poor outcomes in retirement

 The new rules, which will take effect in October 2022, require trustees of “small” money purchase schemes (less than £100million in money purchase assets) to carry out a prescribed value for money test.

 This is based on an assessment of:
 • Costs and charges, compared to at least three large schemes (>£100million in assets).
 • Investment returns, net of charges, against at least three large schemes, and;
 • The trustee board’s governance activity, against a range of criteria included within comprehensive statutory guidance

 The DWP are providing trustee boards with the tools to assess the scheme and their own performance, and make it clear that there are three possible outcomes from the review.

 Like the government’s current COVID-19 rules, these can be categorised into three tiers, as follows.

 Tier one includes schemes that deliver the best outcomes for members. The DWP make it clear that the key criteria for a pass are fund performance net of charges that’s on a par with comparative large schemes, and governance that’s up to scratch. Charges shouldn’t be the main factor here. They shouldn’t be ignored, but the clear message is that returns matter more, as does the governance activity of the trustees.

 In the second and third tiers are schemes that fail to meet the required standard. This is where trustees will need to decide whether they are in the group of schemes where a few changes can move them to a pass, or if they are in the highest risk category, where they can’t realistically meet all of the criteria in fairly short order.

 The direction from DWP is that this group should wind up their pension scheme and find an alternative workplace pension for their members. This might be a master trust or a workplace personal pension.

 It's clear that the DWP expect trustees to comply with the new rules. A compliance statement will be included in an annual return to tPR as well as being a requirement within the annual Chairs Statement which is posted online.

 TPR should be able to monitor compliance remotely, but hopefully they won’t need to. Trustees act in the best interests of their members. I expect that as they're now equipped with clear guidance about what the rules are, they’ll simply follow them.

 
 
  

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