UK - A new framework of principles, 'best practice' guidance and a table of accountabilities for UK defined contribution (DC) schemes has been proposed by the Investment Governance Group (IGG), including a focus on appropriate investment options and accountability for decisions.
The IGG has issued a 12-week consultation on its plans for the framework, which is designed to address the gaps in the DC space not covered by the Myners 2008 Principles or other industry guidance.
It is proposing six principles to be adopted on a voluntary 'comply or explain' basis in the same way as the government's 2008 updated principles for defined benefit (DB) schemes. They are:
These will be supported by 'best practice' guidance to help trustees, employers and advisers meet the principles. For example, in relation to appropriate investment options the guidance states decision-makers should consider the number of funds available, how they are classified and described and consider risk tolerances, investment time horizons and costs including management fees.
The framework also includes a table of 'accountabilities', which is designed to set out who is responsible for making decisions at key stages in the running of both trust and contract-based DC schemes. The consultation noted: "Whilst employers remain accountable in the investment governance process, they are able to delegate their investment governance decisions and processes to third parties".
Bill Galvin, chair of the IGG said: "With the publication of these principles for consultation, the Group sets out its view of the critical investment governance issues for DC schemes. The DC sub-group of the IGG has tailored the Principles and accompanying guidance to maximise the potential for a positive outcome for members through strong investment decision-making and governance."
Victoria Nye, chair of the IGG DC sub-group, said: "This framework has been developed as a useful tool for all stakeholders in workplace pension schemes. It is not intended to be prescriptive, or be regarded as regulation, but simply to encourage and support employers and trustees in implementing better investment governance in their DC schemes, whatever the size and type."
Aegon UK agreed the principles would help strengthen investment decision-making and lead to better governance and outcomes for members. However, Rachel Vahey, head of pensions development, commented: "The consultation has tried to nail down accountability for investment-making decisions. This is straightforward for trust-based schemes as, once the scheme has been set up, it is always the trustees' responsibility to make all the investment governance decisions. It's not so straightforward for contract-based schemes."
She said it is "too simple" to place all accountability for these decisions on employers. "Accountability is often a triage approach, split between the employer, adviser and provider depending on who takes on what role at what time. And for smaller employers there may be no adviser to help with investment governance decisions, so the employer may rely almost totally on the provider," she said.
Paul Trickett, EMEA head of investment at Towers Watson, also warned that while the consultation is a positive step for "one of the most neglected parts of the industry, there does need to be a more concerted effort to register real improvements and quickly".
He argued: "This top-down guidance will improve the DC deal for members if it is aimed at specific improvements. It will also be important to allow fiduciaries the flexibility to decide for themselves how best to implement these improvements. Just as we have seen in the DB world, improving DC governance will increasingly be linked to effective delegation - be that to the provider, adviser or some other qualified body."
The publication of the consultation follows the launch of two corporate governance initiatives by the National Association of Pension Funds (NAPF) this week. These comprise new guidance for pension funds and trustees on implementing the principles of the ISC code - the starting point for the new Stewardship Code for institutional investors - and a specific corporate governance service for pension funds and investment managers called Corporate Governance PensionsConnection.
David Paterson, head of corporate governance at NAPF, said at the launch earlier this week: "These two practical initiatives aim to promote a stronger corporate governance culture and thus help to protect and enhance the value of the investments that funds oversee on behalf of their members. The NAPF has been at the forefront of raising standards in corporate governance for many years and we actively encourage funds to monitor the companies in which they invest."
The IGG consultation closes to responses on 5 May 2010.
If you have any comments you would like to add to this or any other story, contact Nyree Stewart on + 44 (0)20 7261 4618 or email nyree.stewart@ipe.com
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