DWP to allow bulk DC transfers without member consent

The move could help up to a third of the UK’s 2,180 trust-based DC schemes to close and transfer members into an arrangement with greater scale, such as a mastertrust or group personal pension, according to research cited by the government.

Unless you’re discharging everything you’re not winding up the scheme, and that clearly is the goal of the sponsor

Philip Moran, JLT Employee Benefits

Taking away the need for an actuarial certificate

Currently, employers concerned about the value provided in their DC arrangements must follow the same procedures as defined benefit schemes to outsource their provision, or else gain the consent of each individual member.

This means schemes must obtain an actuarial certificate stating that members do not lose any guarantees when transferring, despite the fact that most do not have an actuary and that DC members do not enjoy DB-style promises.

The government consulted on removing this condition, along with the scheme relationship condition, in October when it issued draft regulations.

“What we have had so far is a system that was designed around the making of DB transfers, that people were trying to map onto the DC world, and it wasn’t working very well,” said Helen Ball, a partner at pensions law firm Sackers.

Amendments resulting from the consultation have taken the form of minor tweaks.

Schemes transferring into arrangements not authorised under the new mastertrust regime will still have to seek the advice of a suitable independent person, but the test of independence will now only require the adviser not to have provided key services for the receiving scheme in the past year.

Transfers between schemes with the same principal employer will be exempt from this condition.

In its consultation response, the DWP cited research by the Pensions Regulator showing that 80 per cent of the UK’s schemes have fewer than 1,000 members.

Of these, between 55 and 75 per cent report having weak governance, and Aon Hewitt research suggests that up to a third of the employers of these schemes want to switch to another provider, usually a mastertrust.

The new regulations should make it easier to do something about this, although the main drive to consolidate is likely to come from other regulations, such as increasingly stringent standards on cost disclosure, noted Ball.

Removal of unnecessary conditions

More than anything then, the revision was seen as the removal of broadly unnecessary conditions.

“Employers and trustees don’t see the existing process as adding value to the transfer decision,” said Dianne Day, a client director at Independent Trustee Services.

“This is a bit of a no-brainer,” agreed Philip Moran, discontinuance consultant at JLT Employee Benefits. “You’ve got sponsors that are running schemes that deliver no real value to members, especially in hybrid schemes.”

Moran said the revised regulations were helpful, but that the originals had not been an insurmountable barrier. Obtaining an actuarial certificate, for example, would typically cost £4,000, he said – less than the figures quoted by some respondents.

He also saw potential pitfalls. The new regulations only apply to DC benefits without guarantees, but according to Moran, many schemes have some investments in with-profits funds. It is not clear whether these assets could also be transferred.

“Unless you’re discharging everything you’re not winding up the scheme, and that clearly is the goal of the sponsor,” he said.

Scale can help, but due diligence needed

Schemes considering winding up may feel it is best to wait until the mastertrust authorisation regime, explicitly referenced in the transfer regulations, comes into force, said Day.

This mitigates the risk that they transfer into a scheme that subsequently fails to gain authorisation, thus breaching the transfer regulations. “They have to be confident that there is a robust framework to send their members into.”

Whether trustees choose to transfer to a mastertrust or another provider, such as a GPP, they will have to undertake careful due diligence. They should also not blindly assume that bigger is better, said Ralph Frank, head of DC pensions at Cardano.

“Scale can help DC outcomes if the benefits – for example lower basis point fees, better resourced investment or admin functions – are passed on to members,” he said. “However, this passing on is by no means guaranteed, and the provider makes more pounds from the larger scale.”