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Defined Contribution: t he governance gap

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

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  1. Defined Contribution:the governance gap TUC Member Trustee NetworkAnnual Conference 2013 Craig Berry

  2. 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

  3. 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)

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

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