Good governance in Defined Contribution schemes: what does the future hold?

Qualifying schemes for auto-enrolment purposes must meet certain conditions and quality criteria. They can be defined benefit (DB) schemes (such as final salary schemes), defined contribution (DC) (money purchase) schemes or hybrid schemes. DC schemes can be either occupational pension schemes or contract-based schemes, such as group personal pension plans.

April 2014 marks the point at which ‘smaller’ employers (i.e. employers with below 250 staff) begin staging for auto-enrolment and the date poses some very interesting challenges for them, trustees, advisers and pension providers. In light of the new auto-enrolment regime, there has been increased regulatory focus on DC schemes. As a trustee of a DC scheme, one of the key considerations for 2014 will be to ensure compliance with the Regulator’s code of practice 13 “Governance and Administration of Occupational Defined Contribution Trust-Based Schemes”, effective from 21 November 2013 (“Code of Practice 13”). Code of Practice 13 sets outs practical guidance to help trustees to meet the legislative requirements for running occupational trust-based DC schemes.

It is important to note that one of the ways in which the Regulator supports pension schemes compliance with the law in relation to good governance is by issuing codes of practice and guidance.

What is good governance?

There are many definitions of “governance” but the Regulator’s preferred meaning is ‘the systems and processes concerned with ensuring the overall direction, effectiveness, supervision and accountability of an organisation.’

The key areas covered by Code of Practice 13 include:

Knowing your Scheme:

  • Understanding trustees’ duties; and
  • Reviewing and updating skills and knowledge.

Risk Management:

  • Ensuring there are adequate internal controls.          


  • Setting investment objectives and a default strategy;
  • Ensuring security and liquidity of scheme assets;
  • Monitoring and reviewing the default strategy;
  • Reviewing investment fund performance;
  • Investment decision-making and trustee knowledge; and
  • Acting in the best interests of members and beneficiaries          

Governance of conflicts of interest and advisers/service providers

  • Considering whether there are conflicts of interests; and
  • Appointing advisers and managing relations.          


  • Complying with legal requirements for scheme record keeping; and
  • Maintaining contributions and processing core scheme financial transactions.

Code of Practice 13 also gives practical examples of how to comply with it, and specifically focuses on:

  • The “Trustee Toolkit”, which is a useful online learning resource available to trustees to ensure up to date knowledge and understanding;
  • Communicating with members in relation to investment choices;
  • Consideration of governance with regard to:value for money; transparency of costs and charges for members; transparency of costs and charges for employers; and considering contribution levels;
  • Administration and establishing a robust retirement process; and
  • Consideration of member communications including legal requirements and practical guidance.

Looking ahead in 2014

On the same day the Code of Practice 13 was published, Andrew Warwick-Thompson, the Pensions Regulator’s executive director for DC governance, stressed that, “schemes that fall short of these standards should expect some difficult questions, and they may incur enforcement action in order to rectify breaches in pensions law”. Looking ahead to 2014, trustees will therefore need to be increasingly pro-active in assessing whether their schemes comply with the Regulator’s current material on good governance. In 2014 trustees will need to be particularly aware of:

  • Thematic Reviews: These are reviews that will be undertaken by the Regulator to practically engage with schemes and providers. Such reviews will enable the Regulator to identify both good practice and poor practice, and may even lead to further investigations if issues have been highlighted. Schemes will be expected to voluntarily provide information, however, the Regulator does have powers under legislation to request information.
  • Compliance and Enforcement: In October 2013 the Regulator published its “compliance and enforcement policy”, which increasingly will be put into practice in order to ensure good governance amongst trustees and schemes. Of particular importance are the various enforcement powers that the Regulator will likely call upon if any problems have been identified.
  • “Comply or Explain” template statement: In 2014 the Regulator will publish its governance statement. This is intended to be used by trustees to inform scheme members, the employer and the Regulator whether they meet the DC quality features.

Our thoughts...

Trustees of DC schemes and DB schemes with AVCs should ensure that their schemes are compliant with the Code of Practice 13. The guidance also mentions transparency and disclosure of costs and charges deducted from a member's fund. This is timely, given the Government's recent discussions in relation to imposing caps on charges on auto-enrolment contract based DC schemes and their disclosure.


This information is intended as a general discussion surrounding the topics covered and is for guidance purposes only. It does not constitute legal advice and should not be regarded as a substitute for taking legal advice. DWF is not responsible for any activity undertaken based on this information.

June Crombie

Partner - Head of Pensions (Scotland)

As Head of Pensions in the Scotland office, I bring over 26 years’ experience to my clients to help them to make better decisions and achieve their aims.