In a new series of blogs, Mark Hodgkinson, director at Muse Advisory, talks us through the process of good governance for DC schemes. Who gains and who pays?

We are all witnessing the 'business' of corporate pension provision relentlessly transitioning to defined contribution (DC) plans of one flavour or another.  Thankfully, while this is happening, the Investment Governance Group (IGG) and the Pensions Regulator and - to be fair - many pensions consultants, have become engaged in providing guidance and establishing expectations around the conduct of defined contribution plans. 

Guidance is freely available on the Pensions Regulator's website on how to deliver against the IGG's six principles of DC investment governance using a three stage approach comprising a checklist over forty seperate activities, yes forty. 

If you think that sounds daunting then you clearly haven't had a chance to think about the costs of investment governance yet. Governance costs real money and, generally, good governance costs more than mediocre governance. So just who is going to stand the cost of governance in the DC world? Perhaps it's useful to pause and think about who would expect to benefit from good governance:

- Members? Certainly – good governance should offer a higher chance of good (financial) outcomes.

- Employers? Yes, although less directly; but there must be value in engaged employees who have the financial capacity to retire before reaching their 'sell by dates'. Reputational risk management may also be a relevant factor for many.

- The State? Yes, because retirees with good occupational pensions will pay more tax and be less of a financial burden on other tax payers.

So who will pay for these benefits to be delivered?

- Employers? They may very well provide paid time for governance duties – but will they maintain a budget that DC fiduciaries (whether or not trustees) can call on when expensive professional advice is required?

- Members? Unless clearly set out in the plan rules, a new deduction either from members' 'pots' or contributions is unlikely to be welcome.

- The State? It's not causing problems today so it's politically unlikely.

- Investment managers? Many managers are contributing good thinking to matters such as investment strategy, but fiduciaries should select managers for their investment capabilities and not expect governance 'handouts'.

Moving into the era of auto enrolment, the majority of employers are expected to resolve their obligations by appointing a third party pension provider and, by so doing, will effectively outsource substantial elements of governance other than oversight (and members will bear the costs). But where employers establish trust based solutions then they need to allow, from the outset, for the costs of effective governance. That is, if they want to maximise the likelihood of best outcomes both for their business and their employees. 

Start the way you mean (others) to go on seems like a good maxim here.

Written by Mark Hodgkinson, director at Muse Advisory.