Many people who are have worked with an employer with a DB plan will have or had a DC pot managed by the trustees. This blog looks at what will happen to member’s DC savings as DB plans move into the “endgame”.
How DB schemes came to manage DC.
It amazes me that DC benefits are still considered an afterthought by DB schemes. After 25 years of being taught that for sponsors , pensions are a balance sheet menace, I suppose it shouldn’t. All the same, the way “DC” is discussed, suggests that for many DB decision makers, it is simply lumped into the bucket marked “things that are stopping us doing our day job”.
In their original conception , DB schemes did not bother with “money purchasing annuities”, if you had a savings pot, you could swap it for extra pension using a formula , this included money you’d saved elsewhere in the pension system which could be “transferred in” to buy more income paid by the trustees. In the eighties and nineties there was a craze for “money purchase underpins” where a member was promised the higher of the DB promise or what the members notional DC entitlement would buy! This included DC underpins that provided protected rights on contracted out entitlements.
This gung ho attitude came to an abrupt halt when liabilities became more expensive to fund and the long bull run in equities ran out at the end of the last millennium. Memories live long, many DB schemes are now paying the promises so lavishly distributed decades ago and herein lies the distrust amongst DB managers and regulators of “DC sections”.
Most DB schemes have DV sections, technically they are classed as trustee investment plans (TIPs) with hypothecated benefits for individual savers. They can be funded entirely by the member (what we call AVCs) or can be part funded by the sponsor, (in which case they can be treated as a workplace pension for AE purposes). These TIPS sit within DB trusts because DB trustees are supposed to know about DC investing. In practice it is their consultants who typically design the TIPs choice architecture, help select the provider (usually an insurer) and communicate the benefits to members with hypothecated rights. The consultants usually get the insurers in to execute the contracts with the trustees and administer the investments and keep member records.
The engagement from Trustees in these arrangements is often minimal, it has often been noted that DC matters are relegated to “any other business” on Trustee agenda.
Although these TIPs are owned by Trustees, the money in them is accounted for as a benefit to the members who have contributed to the plans and the promise of payment forms part of their financial planning.
To the sponsor, AVCs and workplace pension rights sat within a trust are a nuisance in the way of buy-out, to the member, the money is part of their retirement plan. They have entrusted the DB scheme to nurture their savings and have an expectation of a duty of care.
Watch the three minute video from Hymans Robertson’s Brenda Kite to get an understanding of the issues that surround the DC sections of DB schemes. Do this whether you are a trustee, sponsor or a member of a corporate DB plan. The destination of the DB pot should not be an after thought and is deserving the same attention and care whether the scheme is heading for buy-out or not.
At the wind up of a DB scheme, my experience is that members are asked to engage through the provision of a transfer value and expected to find their own way home. If they do not take the transfer value into another plan, they will be opted out of the Trustee Investment Plan into something which “does enough” to meet compliance but often not much more. Transfers are still made into legacy insurance contracts such as section 32 buy out plans (as Brenda mentions).
A better way
We are beginning to see insurance companies and master trusts using insurance platforms, creating new TIPs based on the investment funds, platforms and member services available to savers in flagship workplace pensions. These plans are being made available to DB plans (including LGPS and other public sector schemes) and could start upgrading existing TIPs due renovation.
They are likely to provide improved value for member’s money and they offer an easy continuation option as and when schemes wind up, consolidating into superfunds or being bought out by insurers.
Well done LGIM and the Avon LGPS pension fund for taking the stag by the horns and revamping member AVCs using functionality and funds ported from the Legal and General Master Trust
It would be good to see more insurers following LGIM into this area of product development.
For master trusts to use their insurance platforms (Mobius et al) to compete for business. Too many AVC and other DC sections of DB plans are now looking jaded and poor VFM. While these contracts look to be outside the immediate scope of the VFM Framework (hybrid scheme exemption), they should not be exempt from the trustee’s duty of care.
Thankfully, we have consultants who are forward thinking and encouraging the market to do better. Expect to see product development in this area over the next twelve months as the DC providers wake up to the problems that DB schemes will have – so expertly detailed in Hyman’s video.