DC scheme investment governance principles must be applied widely

The investment governance principles put forward by The Pensions Regulator’s Investment Governance Group (IGG) will only improve defined contribution schemes if they are applied widely, experts have warned.

Last month the IGG published the final version of its six principles for defined contribution pension schemes, which cover clear roles and responsibilities, effective decision-making, appropriate investment options, appropriate default strategy, effective performance assessment and clear and relevant communication. The principles are a guide to best practice for any employer, trustee and provider setting up a DC scheme and wishing to maximise the opportunity of a good outcome for its members, but are not a legal requirement.

Towers Watson warns the initiative will fail to improve DC overall in the UK if it is not applied across all schemes and if it does not result in greater clarity for contract-based schemes about employer accountability, as distinct from responsibility for implementation.

The firm suggests that a prioritisation of good governance should enable fiduciaries to add significant value for the member if focused on targeting the needs of their specific plan’s membership, especially around the most appropriate risk/return balance, level of investment sophistication, fund choice and costs.

Roger Urwin, global head of investment content at Towers Watson, says: “We believe the introduction of these principles and best practice guidance mark a step-change for one of the most neglected, but important parts of the UK pensions industry: the governance of DC schemes.

It is understandable why this is the case, given priorities elsewhere, but there is a real opportunity here to improve the investment outcomes for millions of individuals.

“The most important consequence of implementing these principles will be greater clarity around the roles and responsibilities of all the stakeholders, including members, which in turn will help address a perennial DC stumbling block: clear and relevant communication.

“The voluntary approach has been shown to work in the DB world where the evolved Myners principles are now accepted as best practice within an environment of overall tightened regulations. However, while overall transparency and accountability among trustees, providers, employers and advisers will improve, we fear that fiduciary responsibility at contract-based schemes will remain unclear. Currently the involvement of often many different parties, muddies the waters around employer accountability and responsibility for implementation. One positive thought is that just as we have seen in the DB world, improving clarity around responsibility will increasingly lead to effective delegation to some or other qualified group.”