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Defined Contribution: t he governance gap. TUC Member Trustee Network Annual Conference 2013 Craig Berry. The Governance Gap: 3 main problems. Auto-enrolment is a windfall for contract-based providers (but they are not all bad!) Many trust schemes exhibit poor governance

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Defined contribution t he governance gap

Defined Contribution:the governance gap

TUC Member Trustee NetworkAnnual Conference 2013

Craig Berry

The governance gap 3 main problems
The Governance Gap: 3 main problems

  • Auto-enrolment is a windfall for contract-based providers (but they are not all bad!)

  • Many trust schemes exhibit poor governance

  • Even good trusts operate in lax regulatory environment

    We don’t know how many people are in different types of trusts, or contract-based schemes with governance boards

Private sector membership rates
Private sector membership rates

  • Decline of DB, but also trust-based DC

  • Trust membership likely to increase

  • Good news (NEST) and bad news (master trusts)

Governance survey
Governance Survey

  • 46% of DC schemes not review SIP in last 3 years (although legal requirement).

  • 8% never reviewed; 12% don’t have one; 12% don’t know

  • Only 14% of DC boards meet quarterly. 1/3 biannually and 1/3 annually

  • 61% have no training plan for trustees

  • Only 28% have formal TKU policy

  • 29% not used TPR code of practice/guidance

  • Conflicts of interest: 46% have no policy, 41% no means of identifying, 52% no register of interests

  • 29% have no risk register

Governance survey1
Governance Survey

  • Only 43% review charges annually

  • 28% very infrequently or never; 13% don’t know

  • 23% never review appropriateness of investment strategy

  • Only 49% have extremely good or very good understanding of AMC

  • TER – 31%. PTR – 16%. Total charges – 31%

  • Only 22% very good understanding of 6 principles

  • Remember this is all self-reporting. 97% believe they are very or fairly effective at governing scheme

  • Across all of these measures, DB and larger DC schemes are superior

The pensions regulator code
The Pensions Regulator code

  • Contract-based schemes:

    • Code not applicable to contract-based schemes

    • No guidance on establishing governance committees within contract-based schemes

  • Problems with trust-based scheme guidance:

    • Should improve charges disclosure but not strong enough on specific risks of specific charges

    • Not strong enough on annuitisation, etc.

    • Not strong enough on member representation

    • Focus on trustee conduct rather than trustee board composition – this is a major flaw re: master trusts

    • Final code actually diluted rules on MTs, because TPR recognised limits of its own powers

Dwp work on dc quality standards
DWP work on DC quality standards

  • Attempt to improve contract-based governance through provider-level governance bodies.

  • Several flaws:

    • Employers are responsible for choosing the scheme so members should contribute to instructions to providers

    • Range of powers? Conflict with shareholders?

    • Who sits on body – employers or employees?

    • What if there is conflict between schemes represented on governance body?

  • Need employer-level governance (small firms excluded) and provider-level scrutiny

  • Also flawed in terms of default fund reviews, and again overlooks master trust board composition

  • The scale question

Conclusion what should mnts do
Conclusion:What should MNTs do?

  • Within schemes:

    • Member engagement, including full disclosure

    • Consider benefits of scale

    • Frequent reviews i.e. charges, investment strategy

    • Frequent meetings!

    • Training – arm yourself

    • Clearly defined powers and accountability

    • Blow the whistle!

  • Policy lessons:

    • Licensing – for both schemes and trustees

    • Employer-level governance; provider-level scrutiny

    • Rules on MNTs and independence more generally