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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