A new report from the Security of Assets Working Party will provide some much-needed guidance on defined contribution asset security and compensation, advising trustees to adopt a “pragmatic and proportionate approach” to a highly technical area.
DC asset security may have slipped down trustees’ list of priorities amid the onset of pension freedoms, but boards across the country are expected to understand and communicate the levels of protection and compensation available to members as part of their assessment under the Pension Regulator’s code of practice 13.
Many of the protections available to members under the Financial Services Compensation Scheme are only available under very specific circumstances. In its latest report, ‘How safe are your DC assets?’, the Security of Assets Working Party goes some way to pulling these apart.
Think the unthinkable as widely as you can. Prudent trustees should not take answers at face value
David Weeks, AMNT
In scenarios where trustees hold a direct insurance policy with the fund or platform provider, the FSCS should provide some protection.
However, if trustees invest part of the scheme’s assets through a platform, funds on the platform may be accessed through ‘indirect’ insurance contracts or structured as non-insured vehicles that will not benefit from FSCS protection.
Trustees must also consider whether DC assets are vulnerable to "cross contamination" with other business lines of the provider and ultimately have a call on the assets of the provider in the event of insolvency.
Anna Copestake, senior associate at law firm Sackers and member of the working party, said that “there is no asset security nirvana”. She said trustees are best advised to adopt a proportionate and pragmatic approach to the different levels of protection available to members.
“Lots of trustees are grappling with this,” she said. “The key message is don’t panic… make a start and seek advice.”
Asking questions
In its report, the group also compiled a set of questions for trustees to work through alongside advisers and consultants. These include how the funds in which members invest are set up, how secure assets are if the provider's business fails and what level of compensation members would get if something went wrong with one of the funds.
Questions to ask a provider
How are the funds my members invest in set up?
What security do my assets have in the event of the provider’s business failure?
What level of compensation would members be likely to get if something went wrong with one of the funds?
Is the fund segregated from the provider's or manager's other business? If not what other business does it have and is there a 'cross-contamination risk'?
In which jurisdiction is the fund manager regulated? What does this mean for the fund in terms of how it will be treated in the event of, for example, fraud?
For platform providers, is there any limit on liability of the platform provider built into the terms and conditions?
Andrew Cheseldine, partner at consultancy LCP and member of the working party, said the rules around compensation are “horribly complex”.
“The FSCS was built as a retail compensation scheme and has been adapted over time – out of an entirely different set of regulations and legislation,” he said.
Cheseldine added that the questions listed in the report should help trustees build confidence in the level of security in place across their scheme.
David Weeks, committee member of the Association of Member Nominated Trustees, said all trustees are “in the same boat”.
“Even the working group don’t have all the answers on this topic,” he said.
Weeks advocated a prudent approach to scheme security, as opposed to assumptions built on trust.
“Think the unthinkable as widely as you can,” Weeks added. “Prudent trustees should not take answers at face value.”
