Compliance or consolidation – the choice facing trustees
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?
Trustee responsibilities seem to increase year on year. Disclosure requirements have increased to include net investment performance, reporting of environmental social and governance considerations has been increased, value for money assessments have become more prescriptive for some, while reporting around the schemes impact on climate change is a requirement of others.
Looking ahead, the Pension Regulator’s new Code of Practice for Defined Contribution Schemes is likely to include a requirement for trustees to audit their governance framework. The government are looking at how they can nudge trustees toward greater investment in illiquid assets and how they can improve decision making at retirement, both of which will likely lead to more work for Trustees. And we mustn’t forget the Trustee’s responsibility to link their scheme to the Dashboard and ensure ongoing compliance.
With so much change and no end in sight it’s no surprise that Trustees and sponsoring employers are looking at the range of options they have going forward.
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 scheme's charging structure.
- a full range of retirement income options, including drawdown, at no additional 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 Trustee 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. |
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. |
Protected retirement age of less than 57 (after 6 April 2028)
After 6 April 2028, legislation offers some rights to members with a protected retirement age of less than 57.
Members with a protected pension age of less than 57 (but not less than 55) can transfer benefits to another scheme and take them before age 57.
If the transfer is part of a block transfer, members can take all benefits in the receiving scheme (including those from future contributions) before age 57. The 12-month membership rule that applies to pre-55 protected retirement ages doesn’t apply here.
If it is an individual transfer, the member keeps the right to take the transferred benefits before age 57. This doesn’t apply to any other benefits in the scheme.
We recommend trustees and their advisers check the rules and administration systems of the receiving schemes will allow members to keep their earlier minimum retirement age in line with legislation.
What next?
With trustees facing more challenges, 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.
