35: Time to ditch your old DC scheme – jump before you are pushed!
If you provide DC benefits using a traditional pension trust structure, and your DC assets are less than £100 million, new law expected in October 2021 is likely to mean you have to move your DC members into another scheme like an authorised master trust. Time is short and addressing these new requirements without delay will help ensure you have access to advice and market capacity to restructure your arrangements to comply. So don’t delay, talk to your pensions consultants and legal advisers straight away.
The Pensions Regulator and the DWP have been on a mission to improve the governance of DC Pension Schemes. This started off with a governance code in 2013 and was followed up with legislation in 2015 requiring Chair’s Statements, a revised code in 2016 and continued extensions to the scope of disclosures required (eg the requirement to publish an implementation statement from 1 October 2020). This has been part of the laudable drive to improve value for members and the outcomes they receive from their DC scheme.
The underlying premise of these changes is that DC is provided most efficiently on a large scale and the expectation has been that many trustees and employers would react to the ever increasing governance burden by looking to shut down their own DC scheme and instead provide DC benefits for their staff through a group personal pension or a master trust structure.
This has certainly been the outcome, with a very considerable reduction in the number of DC occupational schemes provided by employers and a huge growth in the master trust market. However, this change has apparently not moved fast enough, so new legislation is to be introduced requiring trustees whose schemes provide DC benefits to carry out a holistic review of the value they are able to provide to their members. If they conclude the value from their scheme is not up to the standard available from a larger arrangement, trustees must shut down their own DC scheme or arrangement with a view to transferring DC benefits to a larger scheme.
The intention is to change the law by amending existing regulations so that from 5 October 2021 these new requirements will apply. In summary, it is likely that:
- trustees of any scheme with assets of less than £100 million will need to carry out a review;
- this must be conducted against the terms available in three schemes that are either trust based schemes with more than £100 million of assets (in practice likely to be master trusts) or a personal pension scheme, with the trustees being of the view that at least one of such schemes would be prepared to accept a transfer of the scheme’s assets and liabilities;
- if the conclusion is that the scheme cannot provide good value, then the scheme must be wound up and DC benefits transferred to another scheme, in all likelihood a master trust;
- there are exceptions to this if the trustees can be realistically confident that they can fix their scheme’s – and potentially their own – shortcomings, or the winding-up would be more expensive than implementing a fix, or would cause valuable guarantees (eg guaranteed annuity rates) to be lost (although, in the case of the latter two exceptions, the expectation is that the trustees take action to ensure their scheme provides good value for members going forwards); and
- the trustees must report on this in the Chair’s Statement, and also to the Pensions Regulator as part of the Scheme Return.
This will affect:
- schemes which only provide DC benefits (unless they have less than 12 members, so SSASs and executive pension plans are effectively exempted);
- hybrid schemes with DC and DB sections;
- and DB schemes which hold DC benefits eg because DC benefits were granted on historic transfers into the scheme or where the scheme contracted-out on a protected rights basis historically and there are DC protected rights only benefits still in the scheme.
If a DB scheme’s only DC benefits are AVCs, then they are exempt.
In light of this new legislation, we expect that many trustees will consider it difficult to justify the potentially disproportionate increase in governance costs to both bring their scheme up to the required standards and carry out the rigorous assessments that will be required on an annual basis. Therefore we expect that, in conjunction with the sponsoring employer, trustees would decide the best course of action is to jump before they are pushed and wind up their DC scheme or take steps to strip DC benefits out of their DB scheme. Some trustees will decide this for themselves, others may seek advice on how they measure up against the new assessment criteria first.
As such, we recommend that action is taken to review the position and initiate any DC discontinuance project immediately. There is a strong possibility that capacity constraints in the market, both regarding advice and on-boarding to the new scheme, will mean early movers will be much better off. This action will involve the trustees and the employer working together with advisers to set up replacement pension arrangements as well as dealing with the winding-up of or termination of their existing DC arrangements. Any active members will need to be consulted.
We have extensive experience of the legal aspects of this process as a result of assisting clients who have already made the decision to stop providing DC benefits through their own scheme. This covers:
- processes for winding-up DC only schemes;
- stripping out DC benefits or DC sections from hybrid DC / DB schemes so that the scheme continues but with DB only benefits (without triggering any section 75 debt);
- advising on how benefits can be secured;
- considering the provisions of master trust arrangements for employers and whether they place any unusual or onerous obligations on employers;
- drafting and reviewing transfer agreements to master trusts or personal pension plans;
- ensuring structures are in place to prevent members losing any applicable tax protections;
- possible solutions for hybrid schemes where members have been allowed to use their DC benefits to provide tax free cash at retirement without having to give up their DB pension; and
- arrangements to discharge the trustees from liability, including indemnity and insurance protection.
We would be pleased to share this experience with you to help identify and implement the best way forward for you and your members.