The Pensions Regulator

Guidance published as part of continued focus on DC schemes

Ref: PN08-11
9 May 2008

As part of its commitment to promoting the good running of defined contribution schemes, the Pensions Regulator has today published the first of a planned series of good practice guidance for trustees and employers.

The guidance published today covers Retirement Options and the open market option in occupational DC schemes. This is a critical stage in the individual's retirement planning process where the member must take a decision. Unless the process works efficiently and the member gets the level of support that they need, they may receive an inappropriate annuity or it may be poor value for money.

Trustees have a duty to ensure that there is a process in place to convert the member's money purchase fund into a retirement income. The Retirement Options guidance sets out good practice in key areas, and encourages trustees and employers of DC schemes to follow good practice likely to lead to informed decisions being taken and emphasise to members the advantages of obtaining financial advice.

Trustees must also ensure that members are aware of their right to exercise the open market option, where, instead of the scheme's process, they use their fund to buy an annuity from an insurance company of their choice. Shopping around for an annuity can often produce a higher pension income and the decision to purchase an annuity is irreversible, so it is important that members are able to make an informed choice.

Pensions Regulator executive director of strategic development Chris Dobson said: “The Retirement Options guidance will help employers and trustees ensure they have effective processes in place, and inform members so they are able to make the best possible choices on their retirement income.

“This is the first of a series of planned materials aimed specifically at helping those running DC schemes; work which underlines our commitment to promoting good practice in DC schemes.”

In coming months the regulator plans to issue:

• Question and Answers on DC schemes;
• Communicating with members guidance, good practice examples and case studies;
• DC scheme returns analysis; and
• Investment practices guidance.

These will be published on the regulator's website as they become available.

Trustees are encouraged to sign up to the regulator's e-learning programme http://www.trusteetoolkit.com/, which covers a wide range of topics from running a scheme to investment considerations, and offers DC-specific modules.

Editor's notes

1. The Pensions Regulator works to ensure that pension schemes are well run to provide the best protection to members' benefits. We have identified five main risks to members of DC schemes: member understanding; administrative practices; investment practices; charges; and decisions on retirement choices.

   Our focus is to: educate, enable, enforce – the emphasis is on education and guidance. Intervention is used as appropriate, depending on the seriousness of the situation.

2. The Retirement Options guidance is available on the Pensions Regulator website. It gives guidance on best practice and meeting existing requirements. (It does not focus on communications with members in the period leading up retirement, as the regulator plans to publish guidance on this in due course.)

   It applies to all occupational schemes that are registered schemes and that offer benefits on a DC basis or where a cash sum is used to provide a pension. It does not apply to Group Personal Pension schemes. It will also be of interest to employers who sponsor occupational schemes, those involved in advising trustees, those involved in the administration of DC schemes, providers of annuities and IFAs who offer advice to members or dependants.

3. Helpful links that trustees may wish to pass on to members include:
   • FSA Comparative Tables on pension annuities www.fsa.gov.uk/tables
   • FSA Money made clear guides http://www.moneymadeclear.fsa.gov.uk/
   • The Pensions Advisory Service http://www.pensionsadvisoryservice.org.uk/ TPAS offers an online 'annuity planner' for members
   • Help in finding an IFA http://www.unbiased.co.uk/
4. The Pensions Regulator is the regulator of work-based pension schemes in the UK, with objectives to protect members' benefits, promote good administration and reduce the risk of calls on the Pension Protection Fund. Our approach is risk-based focusing on education and enablement, with enforcement where appropriate. We have the ability to:
   • collect information about pension schemes; through scheme returns, under the scheme funding regime and as well as statutory (including whistleblowing) reports;
   • issue notices requiring actions to tackle non-compliance, prohibit trustees who are judged not fit and proper to carry out their duties or appoint independent trustees;
   • direct pension schemes as to how to calculate their liabilities and the contributions required;
   • issue a contribution notice where there is a deliberate attempt to avoid liabilities, or a financial support direction where the employer is a service company or insufficiently resourced.