Five points for trustees considering consolidation
With trustees of smaller occupational schemes being urged to consolidate, Dale Critchley looks at what they should be thinking about.
The government and the Pensions Regulator have both provided a strong nudge to trustees of smaller occupational pension schemes that they should consider consolidating within larger schemes to drive better outcomes for members. So, what are the main considerations for trustees and sponsoring employers?
- Member outcomes: These are determined by investment returns net of charges, the amount paid in and good decision making when taking money out of the scheme. All of these can be influenced by engagement as well as the options available within the scheme.
Trustees should consider which aspects they’re maximising, and which could be improved through consolidation.
- Retirement options: Trustee diligence in delivering value for money can be undone by poor member choices or high charges in retirement. Those members choosing drawdown could be invested for as long in retirement as they were while working.
Trustees should consider the impact that limited retirement options within their scheme could have on retirement incomes when deciding whether to consolidate.
- Compliance: Government has steadily added to the list of trustee duties as it seeks to improve pension scheme governance. At the same time, it’s made compliance more transparent, and easier to police, through the requirement to post key information online.
Trustees and sponsors should think about how they’re able to meet the growing list of demands to stay compliant and avoid the cost and reputational damage that could come with regulatory enforcement.
- Valuable guarantees or penalties: The scheme may contain investments that include valuable guarantees (e.g. with profits, loyalty bonuses or guaranteed annuity rates) or there may be immediate penalties on transfer to an alternative arrangement. These are important considerations which may lead employers and trustees to conclude that they are better off maintaining their scheme.
Trustees may well need to take advice but guarantees and penalties shouldn’t be considered in isolation. They may be only one factor driving member outcomes and their relative impact on all members should be assessed in the round.
- Members views: Trustees are consistently encouraged to seek member views. In the smallest schemes individual input could be sought. Closing a pension scheme for an employer with 50 or more employees requires formal consultation, so again it’s an opportunity to collect input from members to help with the trustee’s and employer’s decision making.
If trustees, or sponsoring employers, decide to wind up their pension scheme (rules will vary as to who has the power to do this) it’s important to seek advice on the best destination for member funds. This boils down to a choice between:
- Trustee Buy Out Plans or a Master Trust for deferred members, and;
- Workplace Personal Pension Scheme or a Master Trust for active members.
There are advantages to both, and a wide choice within the market, so it’s important to use an adviser with experience across all options.
Dale Critchley, Policy Manager for Workplace Savings and Retirement, is an expert commentator with over 30 years’ experience in a variety of roles within the workplace benefits market. He is an Aviva spokesperson specialising in issues relating to workplace pensions and is regularly featured in the media.