The case for including DB/ DC hybrids in value for member assessments.
There are 5.5m savers with DC benefits within DB schemes and this number doesn’t include AVCs. Of these 1.2m are actively saving and most will be as dependent on their DC outcome as in a standalone workplace pension.
As the purple blocks in the chart below shows, the weight of assets is now in large schemes with more than 5.000 members which have grown from £10bn to £80bn in the last 10 years. While a small number of these schemes are workplace master trusts , a higher proportion of these schemes are single employer sponsored schemes – mostly hybrid. The savers in these schemes risk being left behind in workplace reforms designed to make their money matter and so improve their retirement outcomes,
The Government’s decision to exclude this large group of savers from value assessments is based on an old fashioned and deluded view of the capacity of DB trustees to manage DC. They can’t and they don’t.
In this paper I explain how the myth of value for DC within DB has been created and maintained and how that myth is risking this very large group of savers participating in the worthwhile reforms that will happen as standalone DC schemes consolidate.
Hybrid schemes were originally explained as a way for employers to risk share, but this hasn’t happened.
in 2017, the FT explained that while hybrids looked like a type defined ambition solution (Could hybrids solve the pensions adequacy problem) , they are now a pensions backwater, fouled by complexity.
Though some Hybrid sections of DB plans have DB underpins, these were established for the convenience of employers keen to close DB for future accrual without risking opposition from key stakeholders.
In the words of pension lawyer , Chantal Thompson,
Underpins are just really hard work and people don’t really understand the value [of what’s being promised to them
The links to DB can turn some DC pots into DB benefits when underpins bite but this is no reason to exclude the DC section from the close scrutiny that is happening elsewhere.
Indeed, scrutiny is the more needed as these DC sections risk being consigned to “legacy status” by the insurers who manage them, not least because they are so far from the regulatory gaze.
These DC sections can be assessed for costs and charges, data accuracy and value for members, just as easily as standalone schemes. There is no reason for them to be treated as special cases.
I hope that DWP and the Pension Regulator read this blog and look again at hybrid schemes, big and small and treat them with the same rigor as other types of workplace DC. The savers within these schemes are in need of better outcomes, the assets within them are as important as any other and collectively they form a mighty pool of money that can really matter.