LGPS AVCs- how can Prudential get it this wrong?


Shaun Tetley (pictured) who is chair of the CIPP’s Public Sector Specialist Interest Group and an AVC specialist,  has explained to me the problems the LGPS’ 90 pension funds are having with Prudential AVCs. Shaun and I have developed a friendship over the years and I hope this article helps his work for the many LGPS members he looks after.

Despite my conversations with Shaun, I hadn’t been aware of the scale of the problem till reading Alex Janaiud’s excellent article in FT’s Pension Expert.The article is free to read and I’ll leave you to find out the various shortcomings of the Prudential. My sources tell me that it is virtually impossible to speak to a person from the Pru.

Whatever the IT issues discussed, not resourcing member support is not good enough. This article gives a little background on AVCs in general , and at LGPS and explains why they have been left behind in the search for Value for Money.

This is a much more important matter than it would seem, because AVCs are very important to LGPS members and because the Prudential are the main supplier. This article gives a little background and detail to Alex’s story –  I hope it will be helpful to Shaun and the many like him – who have little support.

What are AVCs?

AVCs – full name “additional voluntary contributions nowadays provide DC pots administered by insurance companies and owned by the schemes on behalf of members. They are normally exchanged for an annuity at retirement though they can be used to pay tax free cash, where members effectively get a tax free pay out as well as tax relief on contributions and  tax free growth.

Although AVCs formed a competitive market last century, they have lost their allure as members find more competitive savings vehicles in personal pensions and find their active membership of the defined benefit schemes ceasing as schemes close to future “accrual”.

People can transfer their AVCs to personal pensions and many do, they generally get lower charges , better services and better options at retirement. But people who have LGPS AVCS have a special reason to keep them – even if they are paying high charges and getting poor service.

Why are AVCs important to LGPS?

AVCs are very popular in the Local Government Pension Scheme as they can be used to fund tax free cash, so avoiding having to swap pension for cash (see above). A reputable promoter of AVC’s – an independent company called AVC Wise has made AVCs even more attractive by arranging salary sacrifice arrangements with a number of LGPS’ individual funds. AVC Wise has  even created a site for members wanting to pay AVCs to model contributions and find out about their contribution limits.

In my dealings with AVC Wise , I sense a strong sense of consumer advocacy. I admire its pragmatic approach to offering guidance to members looking to take advantage of this excellent member benefit. I can only imagine how incensed AVC Wise must be by the Prudential’s failings, Shaun Tetley among them.

This is especially the case as most LGPS members are however given no option but to use the Prudential.  The Prudential is easily the most  common AVC provider at LGPS. Other providers are used – Standard Life and  a Legal & General being the alternatives. They are not reported to be creating the same problems

AVC Wise, which organises the applications  and payments of AVC contributions has been largely responsible for promoting this facility and it saddens me that their work and the diligent saving of so many LGPS members is so poorly rewarded.

Why aren’t AVCs getting the usual scrutiny we’d expect on pension savings?

AVCs are “trustee investments” and do not fall under the responsibility of Prudential’s IGC. Indeed the FT article is filed under DB and de-risking. LGPS does not have trustees in the way corporate DB plans do, instead they have Pension Boards (all 90 of them) which have been in place since 2015.

But  AVCs tend to get little attention from trustees or pension boards. With so much pressure on all DB schemes to demonstrate they are viable, it is  understandable that AVC reviews are a low priority. Although they are DC plans to members, they tend to be considered a DB service (see the way Pension Expert has filed this story). In short they are lost in a crack between the FCA and tPR.

This means that Prudential have been “getting away with it”. Though it now appears that matters have got so bad that they’ve had to “turn themselves in”. How did it come to this? Prudential have a good Independent Governance Committee and a strong  reputation as an AVC provider

Reading IGC reports ,  it doesn’t look as if these AVC plans were in the scope of  either Lawrence Churchill or new IGC Chair Bruce Rigby. So though the Prudential has a consumer duty as any other insurer, it has not been subject to the Prudential’s rigorous IGC’s scrutiny. The FT article points mentions a meeting between FCA and Prudential, but the FCA declined to comment when contacted by Alex Januaid.

The Pensions Regulator has a separate section for oversight of LGPS arrangements but AVCs are unlikely to have been high on its agenda either. It looks like AVC governance has just slipped through the net.

The failings of the Prudential look serious enough to warrant more than the FT’s attention. Clearly the FCA and TPR are aware but I’d be interested to know just what pressure is being brought to bear.

The Prudential , alongside the Equitable Life, dominated this niche market throughout the later part of the last century and maintain a large number of schemes that form part of  corporate DB plans. The money in these plans is every bit as important to members as any other money they own. It deserves to be analysed for the value it is giving for the money being paid both in contributions and charges.

Let’s hope that the FT’s article is a wake up call for the Prudential , but also  to all those with an interest in getting Value for Money from pension savings.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to LGPS AVCs- how can Prudential get it this wrong?

  1. Tim Spriddell says:

    Henry, I appreciate that your post zooms in on LGPS members. However, for the benefit of your other readers, let’s step back to evaluate AVCs in general. You state “AVCs are normally exchanged for an annuity at retirement though they can be used to pay tax free cash”.

    Where benefits arise from a Defined Contribution scheme (providing a pot not a pension), the pots might (as you suggest) be exchanged for an annuity. I’d suggest that members paying AVCs will typically have pots that make the drawdown option viable (i.e. they don’t need to buy an annuity).

    Where benefits arise from a Defined Benefits scheme (primarily providing a pension rather than a lump sum), the AVCs could be used to provide some or all of the sum that the member can receive tax free.

    Cheers, Tim

    • henry tapper says:

      Tim, the LGPS AVcs can be used to fund the tax free cash and improve the pension – it’s a great selling point for the AVCs. There are a few private sector DB schemes that offer this perk, but I think most have closed the option as it reduces the opportunity to control the commutation process (the rate of exchange of pounds for pension)

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