DC pension schemes at the crossroads

The Pensions Regulator recently issued a draft revised code which will put further pressure on the running of these schemes, alongside consultations from the Department of Work & Pensions on more new requirements. Many sponsoring employers are looking to reduce costs, time and risk associated with the running of their pension arrangements. This pressure has led to many schemes transferring their DC assets to another pension vehicle to discharge these governance duties.

And lots of these schemes are looking to DC master trusts to take on their members. 

How should you choose the right direction?

Here’s a five-stage plan to help trustees and sponsors identify the right path forward for you and your members.

1. Identify the top three areas that require improvement / are top of your wishlist

What can you find out from your annual ‘value for member’ assessment or the scheme’s risk register? We look at where value is being lost or where more value could be added. Common areas that we see are:

• Investment design. Trustees need to review their investment strategy to factor in new risk / return areas. One focal topic is ESG factors;
• Engagement. Are you utilising a multi faceted, highly targeted approach to engage the members at the right time for them?; and
• At retirement provision. Many own trust schemes do not offer a ‘to and through’ option at retirement meaning that members have to transfer out at a time when their fund value is at its highest. Transferring to a retail SIPP for example could cost a member up to two years of income in retirement.

2. Consider whether you can you tackle these issues within your current arrangements

Making any changes, such as those identified above, will likely require significant alterations to the DC ‘infrastructure’ – the providers and platforms that provide the technology. Are your existing providers able to help you solve these issues or do you need to look elsewhere?

3. Quantify the cost and value impact to each party; the members, the trustees and sponsoring employer

There will be cost to the implementation of any new solution, and you need to make sure you engage with your members. These costs should be identified particularly where they will impact on the members. As well as the costs, you should try to identify and quantify the value added by making the change.

4. Consider the relative position

Once you have formulated a plan on how to tackle your top three issues, you should pause before proceeding.

Review what a leading Master Trust could offer your members; this is the ‘relative’ position.  

You’ll need to consider the cost and value of moving to a Master Trust at this stage. Yes, there will be one-off project costs, but in our experience the cost to transition are usually around two to three times the annual running costs of the own trust scheme. There are no formal governance duties around Master Trusts for the sponsoring employer, so the ongoing costs can be very low – although we advise some form of regular review of your provision and arrangements is good practice given the investment being made.

5. Where should my members go?

Benchmarking your scheme against a market leading Master Trust through the eyes of the active and deferred members, the trustees and employer sponsor, is critical to ensuring you can map a clear path forward.

It may be that significant changes are required to your current DC scheme to improve the quality and value for the membership and to meet the expanding and intensifying regulatory requirements; before making any changes we would encourage trustees and sponsors to pause and consider the bigger picture.

We have numerous examples where own trust schemes continue to deliver excellent value to their members but these schemes and their providers must keep pace with leading Master Trusts.