Regulatory pressures are increasing on dc schemes
The Pensions Regulator (TPR)’s Code of Practice for the governance and administration of defined contribution (DC) schemes is now in force.
The Code applies to all occupational trust-based schemes which offer DC benefits, including defined benefit (DB) schemes with DC AVCs.
Although the new Code is shorter and simpler than its predecessor, it still requires trustees to deal with a wide range of governance matters relating to the DC benefits within their schemes. Once trustees have assessed their scheme against the Code, and used TPR’s tool to assess their scheme, they may find they have compliance gaps to rectify.
This may not be down to any fault on the part of the trustees – many AVC and DC policies were set up some time ago and have charges and features that are not competitive in today’s market. Trustees have needed to keep pace with changes relating to:
- The new flexibilities for DC pension savers and related safeguards.
- Restrictions on member-borne costs and charges.
- Requirements to ensure DC workplace pension plans deliver value for money.
- Requirements to ensure that default investment strategies are designed in members’ interests.
- More stringent governance requirements for DC workplace pension plans.
Consequently, many trustees and employers of trust-based DC schemes and DC sections of schemes are concerned about the amount of time and money that must be expended on an arrangement which may be outdated and have little perceived value by scheme members, many of whom may no longer be employees of the employer. Discharging the DC benefits could be a solution.
DC discharge can work on a “whole scheme” basis, or a “section/AVC” basis and JLT can offer all the services clients need if they are considering this route. DC benefits can be discharged in a number of ways:
Option 1. Full Scheme Wind Up
If the entire scheme is DC in nature, then subject to the appropriate legal and regulatory formalities, the scheme can be placed into wind-up and depending on the scheme’s rules, members’ DC accounts can usually be discharged without consent to individual buyout policies (known as Section 32 policies) or to a Master Trust. Once the assets have been discharged the scheme ceases to exist and the trustees are discharged of their responsibilities.
Option 2. AVCs and DC sections
If the DC benefits within the scheme are just a subset of a wider scheme, then the route to discharge depends on the structure of the scheme. If there is a legally separate section, then this can usually be wound up in a similar manner to option 1. If that is not the case, then the options available will depend on the precise wording of your scheme’s rules, but will usually allow the discharge in the same manner without triggering the wind-up of the main scheme. If this is not possible, then the scheme rules can usually be amended to allow for the discharge to occur.
Considerations for trustees
If trustees are considering discharging DC or AVC funds, then they should consider the relative qualities of their existing arrangements against the replacement arrangements in the open market. JLT believe that the three main drivers of quality in a replacement policy are:
One of the easiest differentiators between each replacement provider is the annual management and fund management charges that they offer. Each case is assessed on an individual basis, with the size of funds, average fund size, and length of time until retirement being the key differentiators. If all other things are equal, a lower annual charge means a larger pot at retirement. The charges offered by the replacement provider should be compared against those of the current scheme.
The range and quality of the investment funds available to members under the existing and replacement arrangements should be compared. As the majority of members remain in the default fund until retirement, ensuring this is of a good standard means that trustees give members the best chance for good retirement outcomes.
Members of pension schemes are used to interacting with other financial services through the internet and having a range of information and switching options at their finger tips. Again, the services offered by the current scheme, including the range of retirement options, should be compared against those in a replacement policy.
After a market review to obtain terms from replacement providers, each criterion should be assessed to ensure that if the trustees do decide to discharge DC or AVC funds, they are choosing the most suitable replacement vehicle for their members’ needs.