18th October 2016 DC Asset Security – safe haven or headache?
ARC Senior Associate, Anna Copestake is a member of the Security of Assets Working Party. Here she introduces the Working Party’s updated guide and explains why asset security can leave some trustees (and sponsors) reaching for the paracetamol.
In September 2016 the Security of Assets Working Party updated their trustee guide, “How safe are your DC Assets”. The guide is aimed at helping trustees understand the asset security risks associated with their scheme’s investment structure, helping them ask the right questions of their advisers and providers. A link to the guide is contained in The Pensions Regulator’s investment ‘how to guide’ that sits under the new DC Code. A copy can also be found here.
Understanding and managing asset security can be challenging. The starting point is knowing what the scheme’s investment structure looks like, e.g. what’s in the contractual documents and what are the legal structures of the platform and/or third party funds. This is sometimes easier said than done. It involves locating the right documents and asking the right questions of the right people. The Working Party’s guide contains some examples questions.
Then comes the review phase. Risks should be identified, assessed and where possible mitigated. Mitigation can be found in contractual terms or in the legal structure of the fund itself. The availability of any compensation schemes, such as the FSCS, should also be considered. Uncertainties can be found in how the FSCS rules would apply to certain provider or manager defaults and industry clarification on how they would apply on a platform provider default would be welcome. But the fact we are still in need of that clarification is in part because the FSCS has not dealt with a call on its insurance sub-scheme in this context, underlining that in many instances we are talking about ‘tail-end’ risks.
What is important though, is to consider asset security risks in the round. They form one part of a DC governance assessment and, importantly, should be considered in the round with the commercial factors of the investment (e.g. suitability, risk, return, costs and charges).
There are a range of possible outcomes to an asset security review. One is where the Trustees feel comfortable with the current level of security with the investments. Alternatively, they may seek to renegotiate contractual terms or, in some scenarios, consider a change to the scheme’s investment vehicles.
Finally, what should members be told? The DC Code says not only that trustees are required “to give due consideration to asset protection and to understand what would happen in the event of a problem”, but also that they should “communicate the overall conclusion to members”.
Member communications on this topic should be written with care. A balance needs to be struck between providing members with a fair and informed representation of the security of their DC savings whilst not painting a picture that inadvertently and unnecessarily dents their confidence in the pension system.
In its own guidance The Pensions Regulator acknowledges that meeting the standards of the DC Code in this area is not “a straightforward task”!
Download the report from the Security of Assets Working Party here.
The views in this article are intended for general information purposes only and should not be used as a substitute for professional advice. ARC Pensions Law and the author(s) are not responsible for any direct or indirect result arising from any reliance placed on content, including any loss, and exclude liability to the full extent. Always seek appropriate legal advice from a suitably qualified lawyer before taking, or avoiding taking, any action. If you have any questions on the points raised in the above, please do not hesitate to get in touch.