Compliance or consolidation – the choice facing trustees

Compliance or consolidation

With more rules coming in, how can advisers support trustees as they weigh up the pros and cons of how to handle their pension schemes?

During 2019, we’ll see a major escalation in the requirements facing trustees of occupation pension schemes.

Scheme trustees will need to disclose all charges in their Chair’s Statement and amend their Statement of Investment Principles (after taking written advice), to accommodate ESG considerations. They’ll also have to post the results of their efforts online.

The requirement to publish key extracts online will make it easier for the Regulator to monitor compliance. Because of this, we expect the number of schemes receiving an automatic penalty notice (ranging from £500 to £2000) to increase.

What can advisers do to support trustees?

As you’d expect, an adviser could really help trustees as they decide whether to comply with the new regulations or to consolidate and wind up their scheme.

We’ve produced a short guide to why trustees might want to consider consolidating here.

What are the options for consolidating?

Trustees and employers may want to consider one of these three options:

  • A non-consent transfer to Section 32 Trustee Buy Out Plan for deferred member benefits
  • A member consent transfer to GPP for active members
  • A non-consent transfer to Master Trust for deferred and active members

Which solution is best – a master trust or a buy out plan?

In general, there’s little to choose between these two options from a trustee or member perspective. Both offer:

  • competitive pricing which may well undercut the current schemes charging structure.
  • a full range of retirement income options, including drawdown, at no addition charge. 
  • death benefits paid outside of the estate, so they’re not included in inheritance tax liabilities – this is not the case with all section 32 plan available in the market
  • a range of investment options covering all major asset classes
  • online access for members
  • full Financial Services Compensation Scheme protection in the event of Aviva’s insolvency - this is not the case with all master trusts available in the market.

The biggest difference is usually in the governance structure. With a master trust, the scheme trustees carry out independent governance and it’s regulated by The Pensions Regulator. For buy out plans, governance falls under the provider’s remit and it’s regulated by the Financial Conduct Authority. 

Which is the simpler solution?

There are regulations that mean a buy out plan can be a more straightforward option in some circumstances, and master trust in others.

Consideration

Master Trust

Trustee Buy Out Plan

Guarantees in the transferring scheme

If the existing scheme’s investments include a guarantee (for example, some with profits investments), they may not be classed a wholly money purchase. This means an actuarial certificate will be required to transfer the benefits to another occupational pension scheme (including Master Trust) without member consent

There’s no requirement for actuarial advice on transfer to Trustee Buy Out Plans.

 

Scheme Rules

The transferring scheme rules must allow a bulk non-consent transfer. If they don’t, a simple rule amendment is usually all that’s required.

 

There’s no requirement for rules that allow a non-consent transfer. A statutory discharge allows trustees to transfer to Trustee Buy Out Plan where the rules don’t specifically allow it.

Advice

If the non-consent transfer is to an authorised Master Trust, there’s no requirement for the trustees to take advice.

If the transfer is to any other occupational pension scheme, the trustees are required to take advice from a suitably experienced adviser.

We anticipate all trustees will take advice.

There’s no requirement for the trustees to take advice.

 

We anticipate all trustees will take advice.

 

Active members

Both deferred and active members can be transferred to Master Trust as a it can accept ongoing contributions

A Trustee Buy Out Plan can’t accept ongoing contributions, so another scheme would be required.

Protected tax-free cash and protected retirement age entitlements

A scheme can only keep protected tax-free cash sum entitlements of more than 25% or a retirement age below 55 can if the transfer satisfies HMRC’s requirements to be a bulk transfer. These present different issues for a transfer to Master Trust and a Section 32 Buy Out Plan depending on the circumstances of the transfer. 

Circumstance

Master Trust

Trustee Buy Out Plan

The transferring scheme has only one member

You can’t protect entitlements because a bulk transfer must involve more than one member.

You can’t protect entitlements because a bulk transfer must involve more than one member.

A transferring member has been a member of the receiving scheme for more than 12 months  

A member won’t satisfy the requirement to be part of a bulk transfer if they’ve been a member of the receiving scheme for over 12 months.

The master trust you’re transferring to will need to check their records to make sure anyone with protected entitlements who is to transfer won’t inadvertently lose this benefit.

The protected entitlements will stay so long as the scheme is winding up and you’re transferring all benefits for more than one person.

The transferring scheme is not winding up

(e.g. the Defined Benefit Section of Trust is not winding up or only some members of a DC Section are being transferred).   

You can protect the entitlements so long as you’re transferring all benefits for more than one member, and the members have not been a member of the receiving scheme for over 12 months.

The protected entitlements will be lost on transfer.

Only part of a member’s benefit is being transferred

(e.g. the member has DB and DC benefits within the same scheme).      

The protected entitlements will be lost on transfer.

The protected entitlements will be lost on transfer.

What next?

With trustees facing more challenges in 2019, now is a good time for advisers to get out there and start talking to trustee clients. The sooner that happens, the sooner you can both start planning how to move forward with a pension scheme. 

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