LEGAL & GENERALWORKSAVE MASTERTRUST AAF 02/07 REPORT Report on the Governance and Administration Control Procedures of the Legal & General WorkSave Mastertrust LEGAL & GENERAL WORKSAVE MASTERTRUST AAF 02/07 REPORT As at 16 MAY 2016 Contact name: Title: Tel: Email: Richard Atkins Pension Scheme Manager 020 3124 2122 richard.atkins@lgim.com Legal & General Investment Management Limited One Coleman Street London EC2R 5AA
Table of Contents Introduction...3 Disclaimer Letter for release of this report...4 Assertion by Trustee of the Legal & General WorkSave Mastertrust...5 Business overview...8 Control environment... 12 Summary of control objectives... 17 Control objectives and control procedures... 27 This report is strictly confidential and is intended only for use by Legal & General WorkSave Mastertrust. Unauthorised use of this report in whole in or in part is strictly prohibited. If you are receiving this ISAE 3000 and AAF 02/07 report in your capacity as a new or prospective institutional customer (i.e. post 16 May 2016) of the Legal & General WorkSave Mastertrust, then your attention is drawn to the Disclaimer Letter on page 4 which outlines the basis on which you have received this ISAE 3000 and AAF 02/07 report and the Service Auditor s Assurance Report therein. 2
Introduction I am pleased to present the Legal & General WorkSave Mastertrust s first report describing the controls over our governance and administration procedures. This covers controls in place as at 16 May 2016 and has been prepared in accordance with international standard on Assurance Engagements (ISAE) 3000 Assurance Engagements Other Than Audits or Reviews of Historical Financial Information, and the illustrative control objectives for Master Trusts in the Master Trust Supplement TECH 07/14 to AAF 02/07 issued by the Institute of Chartered Accountants in England and Wales. The purpose of this report is to set out how we manage the risks associated with the governance and administration of our Master Trust. We believe this will help you understand how our people, systems and day to day processes work together to provide a sound framework for internal controls and demonstrates our commitment to effective governance. Paul Trickett Chairman Legal & General WorkSave Mastertrust 3
Disclaimer Letter for release of this report PRIVATE AND CONFIDENTIAL The Directors Legal and General WorkSave Mastertrust Dear Sirs, RELEASE OF THE 2016 AAF 02/07 CONTROLS REPORT TO PROSPECTIVE CUSTOMERS OF LEGAL & GENERAL WORKSAVE MASTERTRUST The 2016 AAF 02/07 controls report, prepared in accordance with the illustrative control objectives for Master Trusts in the Master Trust Supplement TECH 07/14 to AAF 02/07 issued by the Institute of Chartered Accountants in England and Wales, and the International Standard on Assurance Engagements (ISAE) 3000 Assurance Engagements Other Than Audits or Reviews of Historical Financial Information, which covers the internal controls relating to governance and administration provided by the Legal & General WorkSave Mastertrust (the service organisation ) as at 16 May 2016, has been prepared by the directors of the service organisation principally for the purpose of demonstrating its governance and administration procedures with reference to the aforementioned Master Trust supplement and for no other purpose. You have asked us to agree to you providing to prospective customers with the necessary knowledge and experience, a copy of the 2016 AAF 02/07 controls report which includes our service auditor s assurance report ( our assurance report ) dated 17 May 2016. We confirm that we are agreeable to you so doing on the clear understanding that our assurance report was addressed to you and was prepared on your instructions as set out in our engagement letter dated 14 January 2015 and therefore items of possible interest to prospective customers may not have been specifically addressed by the 2016 AAF 02/07 controls report the work supporting our assurance report. Nor does PricewaterhouseCoopers LLP warrant or represent that the information in the 2016 AAF 02/07 controls report or work done in connection with our assurance report is appropriate for the interests or purposes of prospective customers. For the foregoing reasons, the 2016 AAF 02/07 controls report cannot in any way serve as a substitute for enquiries and procedures that prospective customers would (or should) undertake and judgements they should make for the purpose of satisfying themselves regarding any matters of interest to them. Furthermore, we accept no duty or responsibility and deny any liability to prospective customers or to any other third party in relation to our assurance report or otherwise, whether or not the 2016 AAF 02/07 controls report or our assurance report therein influences the decision or action of any prospective customer or any other party. Prospective customers are also bound by a duty of confidentiality to PricewaterhouseCoopers LLP, as well as to you. Consequently, the 2016 AAF 02/07 controls report, and information obtained from it, must not be made available or copied, in whole or in part to any other person without our prior written permission which we may, at our discretion, grant, withhold or grant subject to conditions (including conditions as to legal responsibility or absence thereof).notwithstanding our consent to the release of the 2016 AAF 02/07 controls report to prospective customers with appropriate knowledge and experience, our assurance report remains addressed to you and it is a matter for you to decide whether the release of the 2016 AAF 02/07 controls report is appropriate in the circumstances. To ensure that prospective customers have a clear understanding of the terms under which our assurance report is being provided to them, a copy of this letter should accompany our assurance report. Yours faithfully PricewaterhouseCoopers LLP 17 May 2016 4
Assertion by Trustee of the Legal & General WorkSave Mastertrust As trustee directors of the Legal & General WorkSave Mastertrust, we are responsible for: the identification of control objectives to be applied for the purpose of demonstrating sound governance and administration procedures; and the design and implementation of the control procedures of Legal and General WorkSave Mastertrust to provide reasonable assurance that the control objectives on pages 27 to 63 are achieved. The control objectives identified include all of those control objectives listed in Appendix 1 of the Master Trust supplement TECH 07/14 issued by the Institute of Chartered Accountants in England and Wales. The report, the controls and control objectives described within it, are intended to address the Mastertrust s governance and administration processes and activities from the point at which information is submitted by the administrators and any other relevant third parties. It includes how the Trustee exercise governance over the administrators and other relevant third parties where appropriate to meet the requirements of the control objectives and not the activities, processes or control environment of the administrators or other relevant third parties. In carrying out these responsibilities, we have regard not only to the interest of employers (who have entrusted their employees DC contributions to the Mastertrust, or are considering doing so) and the members of the Mastertrust but also to the requirements of the business and the general effectiveness and efficiency of the relevant operations. We have evaluated the fairness of the description and suitability of and the effectiveness of the Legal & General WorkSave Mastertrust s control procedures having regard to ICAEW s Technical Release AAF 02/07 including its Master Trust supplement and the control objectives set out therein. We set out on pages 27 to 63 in this report a description of the relevant control procedures together with the related control objectives which were in place as at 16 May 2016 and confirm that: the report describes fairly the control procedures that relate to the control objectives referred to above which were in place as at 16 May 2016; and the control procedures described were suitably designed such that there is reasonable assurance that the specified control objectives would be achieved if the described control procedures operated effectively at 16 May 2016. Chairman Signed on behalf of the Trustee board of Legal and General WorkSave Mastertrust 5
Independent practitioners assurance report on the governance and administration control procedures of the Legal & General WorkSave Mastertrust To the Trustee Directors of the Legal & General WorkSave Mastertrust We have been engaged to report on the description and design, as at 16 May 2016, of the Legal & General WorkSave Mastertrust s control procedures over your governance and administration procedures designed to achieve the control objectives as at 16 May 2016 as set out on pages 27 to 63 of your report. Use of Report This report is intended solely for and use of Legal & General WorkSave Mastertrust (the Mastertrust ) in accordance with the terms of our engagement letter dated 14 January 2015 (the agreement ), in order to assist the Mastertrust to demonstrate its governance and administration procedures and for no other purpose. Our report must not be recited or referred to in whole or in part in any other document nor made available, copied or recited to any other party, in any circumstances, without our express prior written permission. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Mastertrust for our work, for this report or for the opinions we have formed. Trustee s responsibilities The Mastertrust s Trustee s responsibilities and assertions are set out on page 5 of your report. The control objectives stated in the description include those control objectives set out in the Master Trusts Supplement TECH 07/14AAF to AAF 02/07 that are considered relevant by the Trustee. Independent Practitioner's responsibilities Our responsibility as the Independent Practitioner is to form an independent opinion, based on the work carried out in relation to the control procedures of the Mastertrust as described in your report and report this to you. We conducted our engagement in accordance with International Standard on Assurance Engagements (ISAE) 3000 and with ICAEW Technical Release AAF 02/07 including its Master Trust Supplement TECH 07/14AAF. ISAE 3000 and AAF 02/07 require, among other things, that we comply with ethical and other professional requirements and plan and perform our procedures to obtain reasonable assurance about whether, in all material respects, the Mastertrust s report fairly describes the relevant control procedures and the control procedures are suitably designed. The criteria against which the control procedures were evaluated are the control objectives developed for Master Trusts as set out within the Master Trust Supplement TECH 07/14AAF to AAF 02/07 and identified by the Mastertrust as control objectives to be applied for the purpose of demonstrating sound governance and administration procedures. Our work involved performing procedures to obtain evidence about the presentation of the Mastertrust s description of its governance and administration control procedures, and the design effectiveness of the control procedures. Our procedures include assessing the risks that the description is not fairly presented, and that the control procedures were not suitably designed. An assurance engagement of this type also includes evaluating the overall presentation of the description, and the suitability of the objectives stated therein. We did not perform any procedures regarding the operating effectiveness of the controls stated in the description and, accordingly, do not express an opinion thereon. We believe that the evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Inherent limitations Control procedures designed to address specified control objectives are subject to inherent limitations and accordingly because of their nature, control procedures at the Mastertrust may not prevent or detect and correct all errors or omissions in performing administrative and accounting procedures. Control procedures cannot guarantee protection against (among other things) fraud, especially on the part of those holding positions of authority or trust. Additionally, control procedures identified are designed to give reasonable protection but cannot guarantee absolute protection against all risks, including all possible threats of malicious cyber-attack. The Mastertrust s description of control procedures was prepared to meet the common needs of a broad range of users and may not, therefore, include every aspect of control procedures that may be relevant to each employer company or member of the Mastertrust. In addition, due to their nature, control 6
procedures may not prevent or detect and correct all errors or omissions in performing governance or administration activities. Our opinion is based on historical information. The projection of any evaluation of the fairness of the presentation of the description, or opinion about the suitability of the design or operating effectiveness of the control procedures to future periods would be inappropriate. The information included on pages 8 to 16 describing the Mastertrust s overall control environment and business information is presented by Legal & General WorkSave Mastertrust to provide additional information and is not part of Legal & General WorkSave Mastertrust's controls over their governance and administration procedures. In particular, as noted in the Assertion by the Trustee, the controls and control objectives do not address the control environment of the administrator and other relevant third party. Such information has not been subjected to the procedures applied in the engagement to report on Legal & General WorkSave Mastertrust's controls over their governance and administration procedures, and accordingly, we express no opinion on it. Opinion In our opinion, in all material respects: i. the accompanying Mastertrust s report on pages 27 to 63 describes fairly the control procedures that relate to the control objectives referred to above which were in place as at 16 May 2016. The control objectives identified include all of those control objectives listed in Appendix 1 of the Master Trust supplement TECH 07/14AAF to AAF 02/07; ii. the control procedures described on pages 27 to 63 were suitably designed such that there is reasonable, but not absolute, assurance that the specified control objectives would have been achieved if the described control procedures operated effectively at 16 May 2016. PricewaterhouseCoopers LLP Chartered Accountants 17 May 2016 7
Business overview History The Legal & General WorkSave Mastertrust Scheme was established to provide a solution to help employers through their auto enrolment duties, and to deliver the best possible outcomes to members. It was made to be durable, flexible, well governed and to provide good value for members. We are delighted that so many employers have shared our belief in the Scheme and our ambitions for it. This is witnessed by its impressive growth in such a short time frame. By the end of 2015 there were over 500,000 members in the Trust, made up of 47 participating employers. Scale of this nature is vitally important. It ensures that members can continue to benefit from low charges, and that we can continue to secure the best services and advice possible to help with the efficient running of the Trust. In April 2015 new pension legislation was introduced, which has become better known as Freedom and Choice. Pension scheme members now have much greater flexibility in how they can use their pension pot. They can drawdown a regular or occasional income from their pot, buy a pension annuity or withdraw it as one or more cash lump sums. It was very important to the Trustee that the Mastertrust was able to offer all of these solutions and we are delighted that since 6 April 2015 our members have been able to access their pension savings however they wish. We know that many other pension schemes have made the decision not to offer flexible options to their members, who will be forced to transfer to another scheme or provider in order to take full advantage of Freedom and Choice. Where drawdown is not available through an individual s provider a solution has been made available whereby individuals may transfer to a section of the Legal & General Mastertrust Pension Scheme before they commence drawdown. These members benefit from the same level of governance as any other member would. The Mastertrust is accredited as Pension Quality Mark Ready (PQMR). PQMR is designed for defined contribution multiemployer schemes that meet certain standards covering governance and communications. This means that employers within the Mastertrust will find it easier to get the Pension Quality Mark for themselves. Governance Structure The current Trustee comprises three Corporate Trustees: Legal & General Trustees Limited Pitmans Trustees Limited (Independent Professional Trustee) BESTrustees Plc (Independent Professional Trustee) The diagram on the following page shows roles and responsibilities and the way that we run the trust to provide services to participating employers and members. 8
Ownership and Funding As stated above, the Legal & General Worksave Mastertrust comprises three corporate Trustees; Legal & General Trustees Limited, Pitmans Trustees Limited and BESTrustees Plc. Legal & General Trustees Limited comprises independent and non-independent directors. Independent directors are directors who otherwise have no business connection with the Legal & General Group. Non independent directors may carry out a variety of other remunerated work for the Legal & General Group. Pitmans Trustees Limited and BESTrustees Plc are paid by a combination of retainer and time cost fees. As with all other professional fees in respect of services provided to the Trustee, the Independent Directors of Legal & General Trustees Limited and fees for Pitmans Trustees Limited and BESTrustees Plc are paid by Legal & General Assurance Society Limited. Legal & General Resources Limited is the Principal Employer. It does not participate in the Trust and derives no income or other financial (or non-financial) benefit from it. It is responsible for appointing the Trustee but is otherwise not involved in any of the Trust s commercial undertakings or appointments. Legal & General Assurance Society Limited (LGAS) is the Scheme Administrator. It provides the administration services, including collecting and investing contributions, and paying benefits as and when members leave or retire. It provides a suite of communications materials, including member booklets and investment guides, and delivers an on-line portal for each Participating Employer and their members. LGAS also provides the insurance policy that provides access to the investment platform to Legal & General Investment Managers Limited (LGIM).LGAS is remunerated for its services through charges (Annual Management Charge (AMC) and Fund Management Charge (FMC)) deducted from members pension pots and fee income from those participating employers who choose to reduce the Annual Management Charge by paying fees direct to LGAS. All charges levied by LGAS (AMC and FMC) are based on their standard underwriting criteria, i.e. on standard commercial terms. The FMCs deducted relate to the costs to LGAS of incorporating, maintaining and valuing funds on the investment platform. LGAS pays all the Trust expenses on behalf of the Trustee, including fees, expenses and other disbursements of the Trustee s advisers. LGAS is not responsible for any such appointment. Legal & General Trustees Limited (LGTL) is a wholly owned subsidiary of LGAS. It is an independently chaired company. 9
The Trustee is satisfied that all related party transactions are transparent. Legal & General Resources Limited, and Legal & General Assurance Society Limited, provides services to the Trustee without recharge. Legal & General Investment Management Limited are remunerated via a percentage charge of the funds under their management in accordance with a pre-determined scale agreed from time to time with Legal & General Assurance Society Limited. Management Oversight The Trust offers defined contribution benefits to: the current and former workforces of the Participating Employers. Members who have been transferred to the Trust by the Trustee of another pension scheme. Members who have transferred directly from another scheme. Membership criteria, such as eligibility conditions and contribution rates, are generally determined by each Participating Employer and set out in their Deed of Participation. Each member s pension pot is kept separate from every other member. Likewise, each Participating Employer s membership demographic is kept separate from that of every other Participating Employer. The Trust is a Registered Pension Scheme under the Finance Act 2004. They are governed by a Trust Deed and Rules, by the Deeds of Participation of each Participating Employer, and by any amending documentation. In addition to the information contained in this report, all Trust members are entitled to see, or to obtain copies of, certain Trust-related documents. For this purpose, members includes active and prospective members, pensioners, deferred members with a right to future benefits from the Trust and the spouses and beneficiaries of people in all those groups. The documents concerned are: the Trust Deed and Rules amendments or updates to the Trust Deed and Rules names and addresses of Participating Employers (if not set out in the Trust Deed) the payment schedule in respect of their employer (or former employer) the Statement of Investment Principles Copies of these documents are available to members on request. Recognised trade unions are also entitled to see, or request copies of, the same documents. Trustee The Trustee is responsible for the administration and investment policy of the Trust, and for the appointment of the Trust s advisers. The current Trustee comprises three Corporate Trustees: Legal & General Trustees Limited Pitmans Trustees Limited (Independent Professional Trustee) BESTrustees Plc (Independent Professional Trustee) The Trust rules contain provisions for the appointment and removal of the Trustee by the Principal Employer, Legal & General Resources Limited. The rules also include a provision for an Independent Trustee to be appointed at all practicable times and the composition of the board is updated in line with changing regulatory requirements. The structure of the Trustee is such that the balance of powers always lies with the independent trustees. 10
No provision has been made to appoint Member Nominated Trustees or Member Nominated Directors recognising that issues of confidentiality or commercial sensitivity involving Participating Employers may arise from time to time. There is no legal obligation to appoint Member Nominated Trustees or Member Nominated Directors, however, we invite each Participating Employer to join our Mastertrust Employer Group, which is a formal group, meeting quarterly, where they can represent the interests of their own membership demographic and can contribute generally to the governance processes and other Trust related matters. We also hosted an Annual Members forum each September. The full board meets 6 times a year, and more frequently as required. During the year the following committees hold additional meetings: the Investment Sub-Committee the Communications Sub-Committee the Dispute Resolution and Discretionary Payment Sub-Committee Each of the Sub-Committees comprises appropriately experienced and qualified personnel drawn from staff employed by Legal & General Assurance Society Limited, together with a Trustee representative, who acts as the Chairman. A number of informal meetings and meetings of Trustee working groups are also held. The Trustee has a delegation policy, including the delegation of certain decisions on discretionary benefit payments to the Dispute Resolution and Discretionary Payments Sub-Committee. The delegation policies are reviewed by the Trustee periodically, as are the Terms of Reference for each Sub-Committee. Further details on the Mastertrust and the Trustee can be located at www.landg.com/mastertrust 11
Control environment Management control framework The Trustee stated aim is to co-ordinate the underlying trust governance to deliver a value-for money, efficient, durable and valued workplace pension scheme to employees and ex-employees of client companies. Where applicable, the Trustee must pay due regard to the different requirements of sole governance and combined governance schemes and membership demographics. This distinction is particularly marked in matters relating to communication and investment. In order to achieve this aim it is necessary for the Trustee: to maintain high standards of compliance, governance and communications; to nurture good and effective relations with Participating Employers (and, where applicable, with their Governance Committees), the Trust s advisers and with regulators; to identify and implement changes to adopt emerging best practice in all these areas. Each area of responsibility will be broken down into the following sections: Trustee Policy Statement. Trustee Main Objectives. Trustee Aims in the inaugural period. Areas of Responsibility The following key areas of responsibilities have been identified: Administration. Communication. Trusteeship. Financial & Risk Management. Investment. As detailed above there are 3 Trustee Committees; the Dispute Resolution and Discretionary Payments Committee Communications Committee and Investment Committee. Each has their own Terms of Reference which can be found on the Mastertrust member website: www.landg.com/mastertrust. Risk management The Trustee has overall responsibility for internal controls and risk management. They are committed to identifying, evaluating and managing risk and to implementing and maintaining control procedures to reduce significant risks to an acceptable level. In order to meet this responsibility the Trustee has adopted a risk policy. The objective of this policy is to limit the exposure of the Trustee, and the assets that they are responsible for safeguarding, to business, financial, operational, compliance and other risks where possible. The Trustee has established a Risk Register for this purpose, which is a standing agenda item at each Trustee s meeting. The purpose of the Risk Register is: to highlight the scope of risk to which the Trust is exposed from the Trustees perspective; to highlight the scope of risk to which the Scheme Administrator is exposed; 12
to rank those risks in terms of likelihood and impact; and to identify management actions that are either currently being taken, or that are believed should be taken, in order to mitigate the identified risks. Additionally, the Trustee requires the Scheme Administrator (Legal & General Assurance Society Limited) to maintain a separate risk register which covers additional items specific to their role and duties. They are required to present their risk assessment to the Trustee at least quarterly. Outsourced operations The Trustee has outsourced the pension administration and investment services to Legal & General Assurance Society Limited. There is a Service Agreement in place that sets out all the services and performance standards required by the Trustee. Legal & General Assurance Society Limited report quarterly to the Trustee on the service level performance, Trust activity, member movements, fund performance and complaint volumes and details. Reporting is consistent with the service level agreement and the deeds of participation and this monitored at the board meetings. Compliance The Trustee has in place a services level agreement with Legal & General Assurance Society Limited. The functions outlined below are within the Legal & General Assurance Society Limited s control environment. The Trustee monitors adherence to the service level agreements through its review of the quarterly stewardship reports. There are established strategies for managing market, insurance, credit, liquidity and operational risk. Formal policies define the approaches to risk management and the minimum control standards that should be applied in managing our significant risk exposures. Legal & General Assurance Society Limited deploy a range of risk management techniques to manage and mitigate risks, thereby controlling our risk exposures in line with their risk limits. The effectiveness of these measures is overseen through a governance framework. As a minimum, risk exposures and mitigations are reviewed monthly by management. Legal & General Assurance Society Limited operate a risk identification and assessment process under which their businesses regularly consider changes in the profile of existing and emerging risks. The assessment process evaluates the risks that are inherent in their products as well as those that are presented from changes in the environments that they operate in. Legal & General Assurance Society Limited s risk management information is structured to enable all significant risks to be monitored; compare actual risk exposures and capital positions to targets, limits and tolerances established as part of our risk appetite framework; and assess the delivery of the target customer outcomes. Legal & General Assurance Society Limited s Group Chief Risk Officer (CRO), who is independent of the business line, leads the group risk team. The group CRO works closely with the Group Risk Committee and the Group Board on articulating acceptable risk taking and ensuring the effective operation of the risk and capital framework. The group risk team supports all the businesses and provides objective advice and guidance on a range of risk matters to the business managers and Mastertrust trustees, including matters such as product development, business transactions and key business decisions. The team also carries out assessment of the group s economic capital requirements to confirm that they meet regulatory solvency requirements. Legal & General Assurance Society Limited have appointed divisional risk officers to each of their divisions. This alignment reinforces our risk framework with each of our divisional leaders having a risk expert on their management team. Each divisional risk officer also has a reporting line to the group CRO to maintain their independence. The Corporate pensions business is supported by risk specialists in the CRO team. The Trustee has in place a risk register covering the Trustee s view of risk for the WorkSave Mastertrust and the risk register is reviewed and revised at Trustee meeting minutes. Human Resources The Trustee is required to complete an annual fitness and propriety questionnaire and each Trustee Director is required to have completed the Pensions Regulator s Trustee toolkit. Legal & General Assurance Society Limited is committed to the development of their people, and have a variety of structured and tailored development programmes available to employees to complement on-the-job learning. This includes process and technical training, leadership programmes, 13
mentoring programmes, and career development workshops. Development of employees ensures that we continually build our capability to continue an excellent service offering and proposition to our customers. Performance management and talent programmes have at their core, a focus on clear objectives, tailored personal development plans, and reviews of the aspirations and potential of employees. Through these programmes, continual regular dialogue with employees focussing on: The right people in the right roles Building for the future Career progression and development Destination and retention of our talent There are around 150 staff supporting the administration of the Mastertrust (and other Legal & General bundled DC schemes) across sites in Kingswood and Cardiff. The average service period for these employees is 7 years and staff turnover figures are well below 5%. Monitoring External Audit PwC performs our external audit of the Annual Report & Accounts and this is performed under International Standards on Auditing (UK & Ireland) ( ISAs ) and followed the approach set out in the Audit Plan that is agreed by the Trustee. The trustee regularly reviews and monitors all processes and procedures. Mastertrust Trustee Business plan. Checkpoints are scheduled within the The Trustees also provide an Annual Report to the Legal & General Board and business escalation routes are in place and are utilised as required. Internal Audit A Group Internal Audit function operates within Legal & General which audits systems and processes regularly and the Trustees are notified of any matters for which it would have concern. The Trustee has sight of all forthcoming audits. The Mastertrust Pensions Manager receives a monthly management information pack which highlights performance and formal monthly meetings take place with the Chief Operating Officer of the Administration Operation to discuss service matters. Governance and Administration procedures of the Mastertrust Details of the Governance and Administration procedures of the Mastertrust are detailed in the Control objectives and control procedures section of this document. IT system business and data recovery, data quality and security The Trustee has in place a Service Level Agreement which covers the provision of IT services by Legal & General Assurance Society. Legal & General Assurance Society Limited s data and systems are backed up regularly, retained off site and regularly tested for recoverability. Business and information systems recovery plans are documented, approved, tested and maintained. The capacity of an administration system to take on new business is assessed, approved and regularly monitored. New business take-ons are properly established in accordance with the Mastertrust s rules and contractual arrangements. As new business grows the Trustee monitors the scalability of the Legal & General Assurance Society Limited s administration platform and they receive updates from Legal & General Assurance Society Limited s senior management on systems capability and development. 14
Member data is complete and accurate and is subject to regular data evaluation. Data transmissions are secure and appropriate measures are implemented to counter the threat from malicious electronic attack. Physical and logical access to computer systems, and member and Mastertrust records and data, is restricted to authorised persons. IT equipment is maintained in a controlled environment and the maintenance and development of systems, applications and software is authorised, tested approved and implemented. The Trustees monitor Legal & General Assurance Society Limited s compliance with the Service Level Agreement through the review of the monthly MI reporting. Assessing Value From April 2015 new governance standards apply to all occupational defined contribution schemes. The Trustee provides a governance statement within the Trust's annual report and accounts, setting out how the Trustee will meet these minimum governance standards, which are: Design default arrangements in the best interests of the Trust members and keep these under review. Ensure that core financial transactions are processed in a timely and accurate manner. Assess whether member borne costs and charges represent good value. The Trustee has set out a Statement of Intent which confirms how they will assess whether the Trust is delivering value for money to Trust members. This statement covers: Price - this will cover any costs that relate to members pension arrangements. Default Investment Strategies - default funds are the funds that members pension contributions are invested in if they do not make an alternative choice. Returns on investment Flexibility - members should be able to access their pension savings however they wish. Administration - this will test the level of customer service members receive and the speed and accuracy of financial transactions. Communications - these should be clear and available in a variety of ways. Feedback - each year from 2016 we will carry out a member survey, independently of Legal & General Assurance Society Limited, to gain member views on whether they believe that they are receiving a value for money service. We will publish these results on our website. The full statement can be found on www.landg.com/mastertrust Assessment of investment options The Trustee is required by law to develop and to maintain a Statement of Investment Principles, which describes their investment strategy. The SIP is used to develop the Trustee s tactical and strategic investment objectives.. The Trustee invests in a policy of insurance through Legal & General Assurance Society Limited. This insurance policy allows participating companies, and their members, access to Legal & General s WorkSave Investment Platform, which comprises approximately 180 funds and 27 lifestyle profiles. The investment managers and funds on the platform have been selected following formal procedures and reflect the mainstream of investment management and funds that are most appropriate to the needs of corporate customers and their workforces. The platform is intentionally dynamic, with the flexibility and expectation that there will be fund additions and fund deletions. All day-to-day investment matters are delegated to each of the respective fund managers. The Trustee offers 2 investment governance options; Sole Governance The Trustee selects a range of suitable funds that members may invest their pension pots in Investment options are selected in accordance with the Trustee s Statement of Investment Principles (SIP) 15
A default investment option is selected that members will be automatically invested in unless they choose an alternative investment option(s)the investment range is regularly reviewed by Trustee, their Investment Committee and their Independent Investment Adviser Shared Governance Employers who have internal Governance Committees may choose to operate a shared governance arrangement The employers governance committee works in collaboration with the Trustee in respect of their membership demographic Shared governance arrangements obtain their own investment advice to provide bespoke investment options for their membership, which are then reviewed by the Trustee The Mastertrust Trustee review this investment design and may refuse a design if not deemed suitable or appropriate A different default investment option may be selected to that of the sole governance range The strategy is reviewed regularly and recorded in the Board and Investment Committee minutes. 16
Summary of control objectives - together with the Rationale and Risks Set out below is a complete representation of the independent assurance framework as detailed in TECH 07/14 AAF, the Master Trust Supplement to ICAEW AAF 02/07. The risks are intended to provide context for the control objective. In some cases the control objective is supported by further information to assist trustee and Reporting Accountants. (Reference to trustee includes both individual trustees and directors of corporate trustees). Commercial and Business risks Trustees of Master Trusts need to take steps to help ensure that business and commercial risks do not compromise the durability of their Master Trust and ensure that the interest of the scheme membership are protected. Risk Member s assets or entitlements may be put at risk due to a failure such as an insolvency event at the provider. Commercial or business risks result in a decision to close down, transfer or sell the Master Trust operations and this leads to a loss to members due to inadequate safeguards. Control Objective 1. Discontinuance plans, which address how member assets or entitlements are safeguarded in the event of the Master Trust or any key service provider failing, are documented, approved and maintained. The discontinuance plan should include activities for managing and protecting member assets of entitlements in the event; a decision is made to wind up or close the Master Trust; or the Master Trust s operations/ownership are or need to be transferred to another entity; or a provider becomes insolvent or unable to continue supporting the Master Trust for any other reason. This plan should reflect requirements in the trust deed and rules, be periodically reviewed and any deficiencies addressed. a) Business and disaster recovery Administration and other systems need to be underpinned by adequate business and disaster recovery arrangements. Systems need to be able to manage increased capacity and scale when accepting new business Risk Member Assets or entitlements are put at risk due to loss of data following system failure Control Objectives 2. Data and systems are backed up regularly, retained offsite and regularly tested for recoverability. Business and information systems recovery plans are documented, approved, tested and maintained. 3. The capacity of an administration system to take on new business is assessed, approved and regularly monitored. Trustees regularly review and assess administration systems to determine whether they can manage increased volumes of administration processing and data handling. 4. New business take-ons are properly established in accordance with Master Trust s rules and contractual arrangements. Contractual arrangements between the Master Trust and participating employer(s) are documented and authorised and should include the terms of engagement between various parties, including the responsibilities or each party. 17
Data quality and security Data quality is key to ensuring members receive the appropriate benefits. Also due to the sensitive nature of the information held by a Master Trust, data security is essential. Risk Incorrect benefits are paid out or incorrect calculations are made at other times. E.g. utilisation due to poor quality member data. Control Objectives 5. Member data is complete and accurate and is subject to regular data evaluation. Data transmissions are secure and appropriate measures are implemented to counter the threat from malicious electronic attack. Member data may either be common or conditional data as described in the Regulator s DC code of practice. Member data and records across all membership categories should be regularly reconciled and a data review exercise should be conducted annually or at other intervals appropriate to the Master Trust. Data errors are subject to exception reporting and where data integrity issues are identified a data improvement plan is produced to address poor quality data, including arrangements to resource and fund the cost of addressing any widespread maladministration. 6. Physical and logical access to computer systems, and member and Master Trust records and data, is restricted to authorised persons. 7. IT equipment is maintained in a controlled environment and the maintenance and development of systems, applications and software is authorised, tested approved and implemented. Protection of assets Trustees of Master Trusts need to ensure that there are adequate safeguards over member assets or entitlements. This risk is particularly important as Occupational DC Trust based Pension Schemes do not, in their structure, contain any element of capital adequacy or compensation similar to the employer underpin and Pension Protection Fund protection provided in defined benefit schemes or, in certain cases, access to the Financial Services Compensation Scheme available to contract based schemes. Therefore members bear the investment risk and so it is essential that there are controls over the protection of assets and consideration is given to the availability of compensation when selecting investments. Risk Trustees and members are unaware of their exposure to risks associated with investing in unregulated markets to investments not eligible for compensation in the event of a default, resulting in a loss to member funds through ill-informed investment decisions. Control Objectives 8. Member assets or entitlements are safeguarded from loss, misappropriation and unauthorised use in accordance with a defined policy. Trustees should authorise a policy setting out whether any form of collateralisation is permitted, for example stock lending. All members assets are segregated from assets of the provider and entitlements or rights are the subject of other regulatory requirements and safeguards that relate to asset protection (for example, FCA rules that relate to insured schemes (and rights under the insurance policy)). 9. Cash is safeguarded and all payments are suitably authorised and controlled. 10. Financial protection available to members in the event of default is assessed and documented, and communication to employers and members on request. Whilst investment decisions should not be based primarily on the availability of compensation, trustees should understand the levels of financial protection which may be available to members. Trustees should acknowledge the reasons for selecting investments where compensation arrangements are not in place. 11. Investment decisions relating to the selection of investments on regulated markets and unregulated investments are researched, authorised and monitored. 18
Trustees must predominantly invest member funds in assets which are admitted to trading on regulated markets. Where unregulated investments are offered to members or investments are made through investment managers which are not regulated in either the UK or other jurisdictions; the decision to select and offer these investments in approved by the trustees and this decision is formally recorded; the trustees review the suitability of these investments and this review should be documented; monitoring mechanisms are established to evaluate the performance of unregulated investments; and information communicated to members clearly indicates investment choices which are not subject to regulation and highlights the implication of this. Assessment of value for money Members participating in a Master Trust should receive value for money. Costs and charges should be commensurate to the quality of pension provision offered to the membership. Risk Member outcomes are reduced due to excessive costs and charges which outweigh the value of the pension provision. Control Objective 12. A value for money review is undertaken and this review is documented, approved and findings actioned. A scheme offers VFM where the costs and charges deducted from members assets of entitlements of contributions (the costs of membership) provide good value in relation to the benefits and services provided (the benefits of membership) when compared to other options available in the market. Trustees should carry out a periodic strategic VFM review, for example every three years. The VFM review should take into accounts guidelines set out in the Regulator s DC regulatory guidance requiring trustees to obtain administration and investment reports and market data which enable them to assess the quality of service provided and the level of costs and charges applied to different classes of membership. A VFM report should be made available to customers (i.e. existing and potential participating employers) upon request. Where trustees determine that VFM is not being provided, documented action is taken. Communication of costs and charges Master Trusts need to clearly and accurately disclose the charging structure of the Master Trust. Employers should consider the charging structure of Master Trust and compare with other arrangements when selecting a new pension product. They should be provided with a complete breakdown of all costs and charges that will be incurred by members. Members should be informed about costs and charges that reduce their fund. Risk Members retirement funds will be at risk if an employer selects a pension scheme with high charges that does not offer value for money. Risk Insufficient information provided to members about costs and charges prevents members from assessing whether they are getting value for money from their pension provider. Control Objectives 13. A complete and accurate list of the types of costs and charges incurred by members and employers is documented, monitored and approved. The trustees regularly assess costs and charges to ensure accuracy and completeness. 14. Disclosure of information on costs and charges borne by members is provided to Employers at the point of selection and is complete and accurate. Employers are provided with clear information about costs and charges when choosing a pension scheme for their employees. The form and content of this information should take into account Government and industry standards, for example the Joint Industry Code: Pension charges made clear (which is available at www.napf.co.uk) 19
15. Disclosure of information to members of costs and charges (rates (%) and amounts ( )) are complete and accurate. Trustees should provide members with a breakdown of costs and charges they incur in a readily accessible form and in line with industry and Government standards. This should be provided to members at appropriate points of time, for example; on joining annually thereafter (for example, in the members annual benefit statement) prior to members carrying out transactions that incur costs (for example, switching funds) on request on leaving the scheme/employer (in particular, increased charges for deferred members should be clearly flagged) before charges or funds change. Appropriateness of the default strategies The default investment strategies set up by master Trusts should take into account of the likely characteristics and needs of employees who will be automatically enrolled into it. It is likely many employees in the default strategies will not be engaged in financial decisions, so decisions will need to be taken for them about their risk profile. As such therefore should be an appropriate balance between risk and return for the likely membership profile and the charging structure should reflect this balance. Risk Retirement Income will be at risk if the default strategies are not designed with the likely membership risk profile in mind. Control Objectives 16. The design and on-going suitability of the default strategies is regularly reviewed and monitored. This review is documented and approved. Trustees should take into account changes in regulatory requirements, the demographics of the scheme membership and innovations in the decumulation market and DC investment products. The governance of the default strategy should also take into accounts standards set out in the DWP Guidance for offering a default option for defined contribution automatic enrolment pension schemes and the investment strategy. The design and continued suitability of default strategies should undergo a full review at least every three years. 17. The performance of the default strategies and fund within the default strategies are regularly reviewed and monitored. The performance of the default option should undergo a full review at least every three years and the performance of the funds within the default strategies should be checked at regular intervals throughout the year, taking into accounts the DWP Guidance for offering a default option for defined contribution automatic enrolment pension schemes. Appropriateness of the other investment options (i.e. non default strategy investment options) Members need to be offered a range of investment choices that provides an appropriate variety of risk profiles, so that they can set their own investment strategy. Risk The member s ability to make an appropriate investment decision is hindered by an inadequate range of options. This includes situations where the investment options do not provide a sufficient range of risk profiles, where the number of options is bewildering long or where the range of options assumes an inappropriate level of financial literacy. 20