By Dale Critchley, Policy Manager at Aviva
The primary and overriding consideration should be to deliver a solution that results in the best outcome for scheme members. But good outcomes aren’t delivered through a particular type of scheme. They are delivered by the underlying proposition, the interaction with services that sit outside of the scheme and by navigating the regulatory spider web that can catch out an unwary or ill-advised trustee.
All master trusts are authorised and overseen by the Pensions Regulator (tPR), but that doesn’t mean they are all the same. Neither do they all have propositions that are appropriate to every employer and their employees. Those schemes that focus on the market for established pension schemes may have a more appropriate proposition for savers with larger pots, or they may have more experience of transitioning pension scheme members and assets. All schemes, regardless of structure, will have different propositions and different plans for future development which are often determined by scale and the ambition of their scheme sponsor.
So, should trustees just choose the biggest master trust? There’s a strong argument to say that scale is a major driver of good outcomes. It’s the bedrock beneath the series of government nudges toward consolidation. But the benefits of scale aren’t confined to a single scheme structure, nor do they apply discretely to each scheme or product type.
The key determinants of good pension outcomes come down to the level of contributions paid in, the long-term investment returns achieved net of charges, and the decisions made both in accumulation and when taking benefits. These can be decisions made by governing bodies, who define default structures, or by the members themselves, off the back of engaging and informative communication, guidance, and advice.
Investment in all these component areas requires scale, as the Department for Work and Pensions (DWP) has recognised. But just as these components apply to all defined contribution pension scheme members, so the scale that provides for the investment can come from a range of schemes, not just a sponsor’s master trust. A good example of this might be an app that allows members to manage their pension online regardless of which scheme they are in.
The key to any decision about which pension scheme is best for members is to have an open mind and to seek advice about the whole of the market. A holistic approach should consider the needs of the employee demographic, and the ability of a pension scheme provider to support additional services provided by an adviser. For example, the provision of data to support individual advice or scheme oversight.
The legal and regulatory maze that pension scheme trustees will be familiar with may also lead to preferred solutions. Trustees will need to seek legal advice on their power to transfer, as well as investigate how they might preserve valuable features that result from regulation or the product in which scheme assets are invested. Protected A-day benefits might be lost if block transfer requirements can’t be met. This is a relatively common issue for individuals who have been members of a Group Personal Pension (GPP) or master trust for more than 12 months, which can be overcome by considering alternatives like assignment or a transfer to a defined contributions buy-out plan. The new normal minimum pension age protections might complicate things further. When it comes to product features, the issues created by guarantees or loyalty bonuses need to be overcome.
In all these cases a single transfer solution might not be the answer and the services of experienced advisers are likely to be invaluable.
Which brings me back to the starting point - that the reason for closing a pension scheme should always be based on what’s best for members. It shouldn’t be about reducing employer costs. Savings can be made but they can equally be reinvested in the form of additional employer contributions, advice to members, or enhanced communications and financial education. Employers also need to be prepared to invest in making the right choice for their employees, and that means getting appropriate advice.
The pension scheme is likely to be the biggest investment an employer makes in their employees, and it makes sense to do everything possible to get these big decisions right.
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