DEFINED CONTRIBUTION:
THE 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
 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
%
DB
DC trust
DC GPP DC stakeholder Unknown Total
1997
33.8
10.8
1.1
-
-
45.7
2002
26.3
10.5
7.9
2.6
-
47.3
2007
15.4
8.9
8.3
5.2
2.7
40.4
2012
8.4
8.7
8.9
4.6
1.1
31.7
Decline of DB, but also trust-based DC
 Trust membership likely to increase
 Good news (NEST) and bad news (master trusts)

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 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

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
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?

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
