DC governance statements - the good the bad and the ugly

Since the requirement came in for chairs to produce a governance statement within their annual report and accounts, we have been analysing the statements we’ve seen for what works well and what doesn’t.

The best statements take into account information gathered throughout the year, and present their findings and evidence in way that makes it easy for the reader to reach reasonable conclusions over the governance of the scheme. In addition, they are often well communicated to the scheme’s members through inclusion in the scheme newsletter or similar.

However, not all statements we have seen have been prepared so well. In January 2017, the Pensions Regulator issued the first of 100 fines to a master trust for failure to produce a statement. So far, fines have totalled nearly £56,000, and all fined trustees were named in the latest TPR compliance and enforcement quarterly bulletin, using its power under section 89 of the Pensions Act.

So how can trustees ensure they produce a good quality statement and avoid fines? Below we look at six common pitfalls we’ve seen so far. 

Generic statements

Often the statements are bland and have very few specific details to enable the reader to draw any conclusions, such as stating that there are good controls at the administrator and the contributions were received by the 19th statutory deadline. A comprehensive statement will also give details of when the scheme has fallen short of the requirements of the code and set out how the trustees have sought to rectify matters. For example, if any late contributions have been made the statement gives details on how the member has been affected and the action taken by trustees.

Compliance requirements

We have seen some excellent examples of DB schemes choosing to produce a governance statement for the AVC’s within the scheme. Although there is no formal requirement for DB schemes to produce the statement, the trustees of DB schemes still need to ensure they comply with the DC code. Also, an increasing number of DB schemes have to comply with the governance statement requirements due to historic relevant scheme money purchase assets suddenly coming out of the woodwork. For example, where they have transferred into the scheme due to restructuring of the employer in the past. Previously these had been purely AVC arrangements. Unfortunately for these schemes a governance statement would also have been a requirement in the prior year as well.

Rolling forward

Some trustees simply roll forward the previous year’s statement and where this is generic will of course be simple, however this isn’t what the legislation intended. Trustees should be able to demonstrate their on-going consideration of the DC controls operating in the scheme environment.

Reliance on the auditor

Some of the statements refer to reliance on the auditor in a control based capacity, suggesting that the scheme meets the requirements of the code because the auditor performs tests on timings of transactions and completes an annual audit of the scheme accounts. The auditor will consider the statement in respect of the results of its audit work to check for consistency. However, the auditor should not be relied upon to ensure compliance with the code. Trustees should have their own internal control procedures in place to ensure compliance with the code. Trustees should consider engaging the auditor in further agreed upon procedures engagements if certain aspects of the DC control environment are of a concern.

Investment governance 

There is a requirement to attach the DC Statement of Investment Principles (SIP) to the governance statement, however there have been some instances of statements have failed to do this. Hybrid schemes in particular have in some cases had to prepare a separate DC SIP or enhance their existing SIP to include reference to DC assets (particularly in cases where DC is relatively immaterial to the overall scheme), so that this can be included within the governance statement. Furthermore, often the discussions around social, environmental and ethical factors have also been limited.

Value for members

Many consider this to be one of the most difficult areas to document within the statement. Statements often have limited information on the costs and charges incurred by members with narrative that trustees are trying to obtain the information. Furthermore, we are seeing a limited number of comprehensive Value for Member Policies supporting the statement. How can trustees document this more effectively to enhance the benefit to the reader?

Next steps

Trustees should consider whether they do have the supporting evidence for their governance statement and whether they can enhance value for members by learning from experience and best practice.