DB schemes face decision over AVC funds
Defined benefit trustees are seeking to rationalise their additional voluntary contribution accounts as new rules come into play about how such accounts are managed.
AVCs are individual defined contribution funds, run and managed independently of the DB or defined contribution scheme with which they are associated.
The member’s pot is managed and administered by the pension provider, typically an insurance company. However, code of practice 13, which covers DC funds, means trustees will be expected to have greater oversight of the structure and performance of AVCs.
Ian McQuade, client director at Muse Advisory, said: “There are many schemes that would love to be able to rationalise their AVC accounts and make sure all their members are invested in well-governed, high-performing funds.
“Trustees clearly have obligations to monitor the AVC accounts, but in the past they have been even further down the priority list than the DC section of a scheme.”
Not-for-profit multi-employer scheme The Pensions Trust accepts transfers of AVCs, however, the legacy product remains in place and continues to be managed by the existing AVC provider.
Paul Murphy, head of business development, said: “Most of the problems are not just from AVCs, but legacy DC schemes as a whole.
Trustees clearly have obligations to monitor the AVC accounts, but in the past they have been even further down the priority list than the DC section of a scheme
“Trustees must decide whether they have critical mass, an appropriate charging structure and the right funds in place.”
Salvus Mastertrust, part of consultancy group Goddard Perry, recently launched a product that allows DB trustees to transfer their members’ legacy AVCs into a newer, compliant alternative.
Steve Goddard, managing director at Goddard Perry, said code of practice 13 will require trustees to monitor and assess the AVC structures made available to their members and is an area ripe for overhaul.
He said: “There are hundreds of thousands of schemes looking to wind up and virtually all have AVCs attached to them.
“These are very varied, but often they will have been written many years ago and contain old-style charging structures, limited fund choice, if there is any at all, and there is no easy member access – they can’t look on the internet to see what’s going on with their AVC.”
The Salvus AVC offers online access, with a sub-75 basis-point charge and a range of investment options, including target date funds.
Equitable Life
Trustees may be uncomfortable undertaking a bulk transfer of AVCs out of Equitable Life and may choose to exclude that from any transfer deal.
Equitable Life closed to new business in 2000 following concerns its with-profits fund could not sustain its book of business.
Members saw their fund values fall by as much as half, and had a ‘market value reduction fee’ levied on funds transferred out.
The exit penalties were removed in 2014 and distributions of the the fund have increased, but some members may prefer to not transfer and trustees could take that into consideration.
Goddard added: “Since [the retail distribution review], group personal pension charges have fallen to 30bp or 40bp, but no one has been reviewing the structures of AVCs and they are a drain on a trustee board’s resources.
“Transferring out of their legacy AVCs will allow trustees to focus on their assets and liabilities, reduce audit costs and greatly improve member communications.”
Valuable legacy features
However, trustees must also consider whether their AVCs retain any valuable product features that are no longer available but may have an inherent value, such as a guaranteed growth rate or guaranteed annuity rate.
Although a legacy AVC might appear to be unfit for purpose, these guarantees could have benefits that outweigh the drawbacks.
“This is a matter for the trustees to satisfy themselves about with the help of their advisers,” said Goddard.
“They will have to determine whether it is worth giving up these guarantees and whether their members would be materially better off in a new product.”
Pádraig Floyd is a freelance journalist
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