The Financial Conduct Authority has consulted on value for money in personal pension schemes and is aiming to publish a policy statement soon.
The government also intends to change the law the law so that, from 5 October 2021, the trustees of most occupational (trust-based) defined contribution (or money purchase) schemes with assets of less than £100 million must complete an annual, more detailed, value-for-members assessment taking account of new guidance. If the scheme does not provide value for members, the trustees must say whether they are going to consolidate (terminate the scheme and transfer its members to another scheme) and, if not, the reasons why and the action they are going to take or have already started to take to improve value for members.
The message coming through for occupational defined contribution (DC) schemes therefore is that the scheme's trustees must be prepared to either demonstrate and certify effective governance and value to members, or consolidate with a larger scheme. Certification must be made to the Pensions Regulator, which has shown a tendency in recent years to penalise trustees for governance errors (such as for issuing an inadequate or late chair's statement).
Employers with occupational DC pension schemes or hybrid pension schemes (those with both defined benefits, such as final salary benefits, and DC benefits) should discuss these developments with the trustees to understand their views and preferences as the solutions may require joint action.
Employers with small occupational DC schemes or DC sections, particularly legacy ones open to only a few or no current employees, may wish to consider options for closing those schemes or sections and work with the trustees to transfer the accrued DC benefits to a larger arrangement, such as a master trust. Occupational DC pension schemes or DC sections can be expensive to administer and these new requirements will increase that expense. Does it make sense to continue incurring these costs until the youngest DC member retires or takes a transfer out? Master trusts – commercially run DC occupational pension schemes for unconnected employers that are authorised by the Pensions Regulator – are particularly popular consolidation vehicles.
The big advantage of making a bulk transfer is that the DC members (who are likely to be mainly former employees) would not need to agree to the transfer provided certain requirements are met. It is straightforward for a transfer to an authorised master trust to meet those requirements. Inviting members to take individual transfers sounds good on paper, but how confident are you that every member would respond and take a transfer? Even if only a handful of DC members remain, the trustees will need to comply with the DC governance requirements. Demonstrating value for money for a few members is likely to become even more difficult.
Joint employer and trustee bulk transfer projects require legal advice in a number of areas. If current employees contribute to the DC occupational pension scheme, the scheme would need to be closed for future service before the accrued DC benefits could be transferred. This would require at least 60-days' consultation with the affected members (or their appropriate representatives) and, if the closure proceeds, their enrolment in another qualifying workplace pension from the date of closure.
Legal complexities can arise, particularly where some scheme members have both DC benefits and defined benefits or where benefits have been underpinned in some way (such as by a guarantee that DC benefits will not be less than the Guaranteed Minimum Pension (GMP)). (The GMP is a defined benefit earned during contracted-out employment before 6 April 1997 in the place of part of the state pension). It is unlikely that a master trust will accept a transfer of underpin benefits so a solution would be needed to remove or separate the underpin benefits to ensure that all DC benefits are transferred from the scheme. It is also important to consider tax because DC members may enjoy certain protections, which they would not wish to lose when their benefits are transferred.
Once a bulk transfer is done, we recommend that employers establish a system for scrutinising and monitoring the master trust for quality of service, value and suitability for their workforce. Are your employees getting the information and support they need in the right format? This is important at every stage, but particularly as employees approach the period during which they may wish to retire. A good option is to establish a governance committee, comprising both representatives from management, HR and the workforce, with the remit to seek advice and make recommendations. A governance committee would also be able to oversee other workplace pension providers (such as personal pensions or self-invested personal pensions) in this way.
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