The costs of maintaining DC deferreds within an occupational pensions trust is firmly on the corporate agenda, especially where the administrative costs are born by the sponsor and not paid by the member from his fund.
Some years ago, the CFO of a company with a DC scheme with over 10,000 deferred members likened her trustees to Russian oligarchs who in the 19th century enforced their feudal rights by claiming ownership of millions of peasants (souls) who had been their serfs but were now – dead!
Her grievance was that the company was by her reckoning paying over £1m pa to sponsor the retirement savings of ex-employees who were working for her rivals. The trustees were using these “dead souls” to inflate their status at the expense of her shareholders.
I’ve spoken to several such trustees since then and heard their side of the argument. There are two issues, firstly”ensuring there is no detriment to deferred members in transferring them to another arrangement” and secondly, “assuming such an arrangement is found, how we get members to move”.
The trustees I spoke to were anxious to help. One mentioned that reducing DC costs would help the trustees in their negotiations on a much bigger issue-keeping the DB scheme open to future accrual.
All the trustees I spoke to were looking for help.
More recently I came across a Master trust, set up by two pension managers to provide an occupational DC pension scheme for employers looking to outsource DC governance. They told me that they had an answer to the Trustee’s dilemma and that where the scheme actuary was prepared to sign a GN16 undertaking (confirming that members were not disadvantaged), the trustees could reasonably discharge their obligations to deferred members by transferring them (without needing their consent) to the Master trust.
They had actually carried out a bulk transfer of deferred members but it had been an uphill struggle.
This seemed very encouraging but I was keen to know, now such a solution existed, why it was not more popular.
The answers were familiar
“The Master trust had trouble getting airtime”.
“When it got itself onto the agenda of a trustee meeting there was insufficient time for the matter to be debated”.
“Even when the trustees had heard the Master trust’s arguments, decisions were typically being deferred as trustees struggled to familiarise themselves with the arguments”.
“There was little help coming from scheme advisers who were too unfamiliar with the solution to endorse it”.
In Australia, this issue has been dealt with and arrangements are in place so that the benefits of members, who change employment and no longer participate in one scheme, are transferred to another (unless they take active steps to move their benefits themselves).
The providers of insurance arrangements often operate an “active member discount” where the sponsor’s subsidy of the administration costs while the member is an employee falls away when he or she leaves.
This is an alternative solution but one that many trustees worry about the legitimacy of “differential pricing”. It should be debated.
The option to transfer members without consent into a suitable Mastertrust exists (and there are now several of these available to trustees in the UK). It too is a matter that should be debated.
It would be helpful if the Pensions Regulator could clarify its position on the Trustee’s obligations to deferreds and what might be considered the key evaluators in helping trustees establish whether the Mastertrust was “fit and proper”.
It would be helpful if the solution offered by the Master trust could be given the air-time to ensure trustees and their advisers could familiarise themselves with the concept.
I recently attended a meeting of a group of trustees called the Trustee 100. The meeting had been established by a consultancy to promote an online forum to be called www.mallowstreet.com. There seemed consensus among the participants that solutions such as that offered by the Mastertrust were not accessible to many trustees or their managers for precisely the reasons that the Mastertrust itself had cited.
Trustees and pension managers wanted access to solutions to their problems, a means to evaluate those solutions, a means to share experience with other trustees and seek the view of their peers and other advisers. One of these trustees mentioned specifically the problem of dealing with his DC deferreds.
If Mallowstreet can ease this and other such problem by offering solutions, I am all for it.