Yesterday I wrote about an opportunity for insurers to market Trustee Investment Plans (TIP) to DB trustees (an opportunity for advisers too). A TIP is simply a policy owned by the trustees that is divided into cells – each destined to be paid to a named member). The TIP comprises an investment platform, funds and (usually) record keeping and a member interface.
This is not an opportunity that will be created or even promoted by the VFM Framework or the Pensions Regulator’s guidance to trustees and employers. That’s because DB schemes with DC stuck in the trap (aka hybrid schemes) look like swerving the three tests.
It is an opportunity for those with a fiduciary interest in the members of occupational pensions and for providers keen to exercise their consumer duty (and win new business)
By excluding DB trustees from assessing DC sections using the VFM Framework, the DWP are assuming DB fiduciaries will see their DC savers right. They may need a nudge. This blog explores how that nudge could be developed.
Let’s be clear, this is not a DC backwater. Hybrid pensions are more than a niche. Firms like LGIM and Aviva know it and are creating new product to meet fresh demand. Demand is being created by consultants and by corporate trustees who look across to what is happening in other areas of DC provision.
This is a major area of potential change. My source in Brighton reckons that of the 1260 DC schemes TPR is targeting for consolidation , half are hybrid rather than “self standing”.
You might ask “so what about these 27,000 occupational pensions schemes, recently mentioned by Tom McPhail in a Laing Cat podcast”? The vast majority of the DC schemes under regulation are SSAS and EPP. TPR has worked out that it can do little about the long tail so is targeting the fat body – hybrids included.
My source in Brighton tells me that half of the 600 odd hybrid schemes have fewer than 100 members. But the bigger half of hybrid schemes are very big indeed; Centrica’s workplace DC plan is within its DB trust and classed as a hybrid. Together with a few other such plans, structured to protect DB members from wind-up orders, the large hybrid plans are some of DC’s best kept secrets. Secrets pensions are rarely a good idea – they tend to be a prey to neglect
Refreshing selected hybrids makes for a manageable project for the specialist employee benefit consultancies unconflicted by being vertically integrated.
And for insurers it is an opportunity to get on the front row of the grid, when the DB scheme is bought out or consolidated.
What of AVCs?
AVCs haven’t been popular for some time for members and trustees of corporate pensions.
Since the revenue allowed personal pensions to be funded concurrently with occupational schemes, many advisers have promoted saving into their wealth management to those in DB schemes with spare cash to save. And of course most DB schemes are closed to future accrual making AVC saving difficult.
And much of the money in AVC schemes is “old money” invested for decades and mature like a fine wine. Most of it was originally invested in with profits and is pretty well gated by guarantees. Corporate AVCs are unloved and a part of DC legacy that’s inaccessible to new kids on the block
There is rarely a business case for competing for AVCs to corporate DB plans as new standalone new business. But refreshing AVCs by upgrading legacy plans to modern workplace pension plans makes sense , especially where there is an open DC section elsewhere in the DB trust.
This however is not the end of the story for AVCs.
The AVC opportunity is in the public not the private sector
The major opportunity is in the public sector where AVCs are plentiful and well funded by DB savers attracted by tax breaks and – for LGPS – national insurance breaks. Most of the attention on AVCs comes from employers participating in LGPS who have found that shared cost AVCs provide staff with a valuable employee benefit that can reduce pension costs to the employer.
An employee benefit…
Shared cost AVCs are written into the rules of LGPS and offer a massive break, allowing savers to swap personal contributions for extra employer contributions saving them and employers a bucket load of national insurance. Shared Cost can fund tax free cash, letting savers swerve punitive commutation rates and it doesn’t even impact the benefit calculation (the sacrifice doesn’t reduce pensionable salary).
That saves the employer money
The terms of most shared cost AVC arrangements mean that employees get the national insurance saving on their payments , while the employer gets to keep the 13.8% NI saving (less administrative costs).
AVCs popular for unfunded public sector schemes as well
Unfunded public sector pension schemes also attract a lot of AVC saving, though they don’t (currently) get the advantage of salary sacrifice, or all the benefit breaks of LGPS shared cost.
Without the incentive of NI savings, employers are less likely to push for upgrades in AVCs as an employee benefit and the impetus to improve member savings will be lost. So we hope that a change is afoot in guidance from HMRC.
While the employer impetus for change is less, major providers are looking to public sector fiduciaries (such as the NHS pension scheme) to upgrade their AVC offerings in the light of the work done by the DWP on VFM.
An immediate and compelling opportunity
Even despite these substantial opportunities, the insurers and master trusts with access to insured platforms, are still to properly enter the market.
Prompted by VFM and Consumer Duty, AVC providers are having to clean up their act. In the process, they have found that the biggest fish in the ocean – the Prudential, is infact a turtle caught up in its own legacy.
Look out for new interest in old policies.
