Trustees of the defined contribution FKI Group Pension Plan have agreed to wind up the scheme, transferring active members to a mastertrust, as experts note governance and cost management benefits.
While mastertrusts have been scrutinised due to governance issues, some employers decide not to run a standalone trust-based scheme and agree to transition members to a mastertrust or contract-based arrangement instead.
Members of the scheme were told that in July 2016, following a decision by the plan’s sponsoring employers, the trustees have “agreed to wind up the plan”.
For trustees, there is comfort that the members will continue to be looked after
Ian McQuade, Muse Advisory
A scheme communication explained that active members’ funds “have been transferred to the Brush Mastertrust policy arranged by the Brush Group”. Deferred members, on the other hand, have been transferred to a BlackRock buyout policy.
The DC plan’s only employers paying contributions in the scheme are energy sector provider Brush Electrical Machines and electrical switchgear manufacturer Hawker Siddeley Switchgear.
While the principal sponsoring employer, FKI, was acquired by Melrose in 2008, FKI and its subsidiaries still exist and therefore have remained the principal and participating employers of the plan.
Transferring DC pots
Anne-Marie Winton, partner at Arc Pensions Law, said that information on how to go about winding up a DC scheme set up under trust, like the FKI Group Pension Plan, is set out in its governing trust deed and rules.
She explained that this document “will typically give the trustees power to transfer out DC pots with the members’ consent to a suitable receiving scheme or schemes, with the DC pots for non-consenting and/or deferred members being secured with an annuity”.
Winton said the active members of the FKI Group scheme may not immediately notice much difference when they transfer their DC pot into the new Brush Mastertrust, because both offer funds with Legal & General.
Mastertrusts have the next milestone in sight
Mastertrusts are on their way to becoming a dominant force in the UK pensions system, having woven themselves into the fabric of workplace defined contribution provision.
“But as to whether the fund choices for active members and the contribution rates will be identical is another matter, and members may want to take the opportunity to revisit their investment selections and find out whether pensions freedoms, such as flexi-drawdown, are now available to them,” she added.
Lydia Fearn, head of DC and financial wellbeing at consultancy Redington, said this kind of move to a mastertrust is popular because “it’s reducing the governance over the trustees of the plan, but maintaining strong trustee governance with a mastertrust, and we see this happening quite a lot”.
For some companies, particularly those running defined benefit pension schemes, “the DC is potentially an expense that maybe they could move” while maintaining the quality of governance, she noted.
Reducing costs in the long term
Ian McQuade, director at consultancy Muse Advisory, said that winding up an own-trust DC scheme generally happens when the scheme is no longer the active pension scheme used by an employer.
“At this point all members become deferred and new contributions will be paid into a new arrangement,” he explained.
He said that “leaving the old scheme running means that the company is likely to be paying ongoing costs until members take their benefits, so winding up the old scheme can reduce costs over the medium to long term”.
Although it can be a complex process, winding up a DC scheme, where each member’s benefits are distinct, is significantly easier than winding up a DB scheme, McQuade added.
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Transferring members’ benefits to a mastertrust “can deliver benefits to all parties”, he said. “For trustees, there is comfort that the members will continue to be looked after and won’t be just left invested in default funds that cease to be appropriate for their needs.”
McQuade added that for many DC schemes, moving members to a mastertrust means the members’ costs will reduce if the fund range is the same because of economies of scale.
The cost advantages are not limited to members, though. McQuade said that for sponsors, the economies of scale within some mastertrusts can also lead to significant reductions in fees being charged to the employer.
