Written by Simon Pickerill, Broadstone Corporate Benefits
In our last article we flagged up the impact of impending regulatory changes on employers with a trust-based pension scheme and outlined some of the possible implications. In this short follow up piece, I’d like to offer some pointers and a possible roadmap that might help those employers.
Direction and commitment – why your trustees need yours now
The new Value for Members (VfM) requirements will reset the world of trust-based pension schemes and challenge employers and trustees to rethink their approach.
Just as many organisations needed time to reconsider their models and build contingencies ahead of Brexit, sub £100M fund DC (defined contribution) pension trustees need their scheme’s employers to be mapping their pension scheme strategies out for when the new regulations take effect in October this year. If you are one of these employers you should be plotting your course of action as soon as possible.
New VfM regulations will require trustees of pension schemes with less than £100M of assets to test their schemes against the largest UK schemes; including one which is ready and able to take in the smaller scheme membership if necessary. When the smaller scheme is not delivering the same overall value package for members as the larger comparator schemes, these smaller scheme trustees will have to confirm whether they will be transferring members into larger schemes and winding up, or what they are going to do to improve value for members under the existing scheme. The government is clear that larger pension schemes are generally using economies of scale to provide lower cost, higher returning, better governed pension schemes than smaller ones can. Driving consolidation of pension schemes is their stated aim and further legislation is promised if it doesn’t happen fast enough.
What are your options?
There are three ways the new VfM tests can play out:
- Pass VfM – continue and re-test the next year etc.
- Fail VfM – upgrade, continue and re-test the next year etc.
- Fail VfM – consolidate and wind up
A ‘pass’ is good news for your scheme members although it is likely your trustees will need you to keep investing in the scheme to keep passing the tests in future years. Any ‘fail’ will attract regulatory attention and an expectation the scheme will need to wind up. Fail and upgrade means immediate investment in the areas of shortfall. Fail and consolidate and wind up will certainly bring costs and need careful handling. Some forward thinking and early forecasting means less risk of unexpected costs and distractions. How do you do that?
Recognise the requirements
2021 VfM is just the start of an annual testing cycle. David may pass the Goliath test in year one but the Goliaths will keep coming back, larger and better resourced, year after year. Get a view on the likelihood of a fail and the costs of an upgrade or wind up and the benefits of continuing versus moving to a larger scheme.
Rethink your strategy
Your scheme will have been set up for specific purposes so it makes sense for employers affected by the new 2021 VfM tests to revisit those purposes with a fresh pair of eyes.
If you choose to continue, you must prepare to invest to keep pace and your trustees need to know the extent of your long-term commitment to the scheme – how much you are prepared to pay to meet the objectives you want from the scheme.
Get an independent perspective
Your scheme will have its own distinct characteristics and large scheme propositions vary. So, your trustees will need to choose three large scheme comparators to test against that meet your expectations and go some way to matching your own scheme’s characteristics. And at least one comparator should be willing to accept your scheme’s assets and members if necessary.
Whether you expect to wind up your scheme or are intending to continue with it, it makes sense to choose ‘good fit’ comparators from the outset. If consolidation is a possibility, save time and money by choosing a potential suitor early on.
So, you are likely to need help on getting a view of the whole of the ‘large scheme’ market – ideally from an independent source with no large pension scheme products of their own to shortlist. Collaboration with the trustees is essential. Support for both of you from specialists with no large scheme conflicts, can be invaluable. This might mean looking for advice outside the existing scheme ‘VfM providers’ to help you define a robust, independently guided decision making process.
Readers can find a simple checklist that can help them identify their own specific issues and explore the options open to them here.