"Proper governance of schemes is an essential piece of the puzzle," says Pitmans Trustees' Steve Carrodus as he talks about the emergence of contract-based governance.

Back in the late 1980s and early 1990s there was a boom in the growth of Group Personal Pensions (GPP).

Any employer setting up a new scheme would be advised definitely not to accept the "open-ended" liability of a final salary plan, so the choice was between trust-based and contract-based defined contribution (DC) - under which the members would take the investment risk. Since the employer was making the decisions, the attraction of contract-based DC usually won the day. The employer would not have to be involved after the plan was set up and the insurer would often provide staff to meet with potential members to sign them up. The costs would be deducted from the funds, so the employer had a fixed cost pension arrangement meaning little thought was given to the members and the potential outcomes in terms of pension.

The position would probably be slightly different if the employer was closing a defined benefit (DB) scheme to replace it with a GPP. In this case the contribution rate or scale of rates might be designed to produce a similar outcome for existing members, based of course on certain generous assumptions.

The choice of investment funds was dependent upon the provider's stable of funds. There would not always be a default fund, but if there was it would more often than not be the insurer's "balanced managed fund". Only later did approaches develop and default fund design was considered more carefully. Later still basic forms of projection tools started to be offered to members, largely to encourage additional member contributions.

Some enlightened employers realised that what had been created was a governance vacuum. Prompted by consultants, who had seen much of their business disappear, governance committees started to evolve and the new Regulator tried to encourage this - believing it had a remit to regulate personal pensions. Many plans, however, attracted little or no attention and suffered from a lack of review of investment funds and indeed administration service.

However, at last we have seen some real positive action.

Now Legal & General has become the first insurer to announce it will set up a governance committee, with independent membership, to review the investment funds chosen by its contract-based customers. Their initiative flows from the work that has been done within the new DC Mastertrust and their desire to see a reasonably level playing field. Aviva announced last week that they too would look into establishing a similar body to oversee their contract-based business.

This new move is to be welcomed and it is hoped that many more employers will review their involvement in the light of this initiative, as the insurers can only do so much within their remit. Proper governance of schemes is an essential piece of the puzzle for securing good member outcomes and healthy retirement funds – which is, after all, the reason for all of this. It is now up to the industry to continue to go further in their pursuit of fairness and engagement amongst all member groups.

Written by Steve Carrodus, director, Pitmans Trustees Ltd. (PTL)

SCarrodus@pitmanstrustees.com