The drive for consolidation
Over recent years, my colleagues and I have seen many changes that are driving further consolidation of master trusts and employer-sponsored trust schemes. Top reasons being:
- Pension freedoms
- Tightening governance demands
- Higher charges
Consider too the government’s recently proposed changes from 5 October 2021. These changes aim to encourage DC occupational pension schemes (operating for more than 3 years with less than £100m in assets) to regularly consider value and consolidation. If these proposals do come into play, no doubt some schemes may struggle with the extra governance standards and consolidations will rise.
Currently, there are around 1,800 single-employer trusts with over 12 members in the UK*, and this is expected to halve in the next 10 years.
We’ve been busy this financial year, welcoming 6 bulk transfers from trust-based schemes which have chosen to wind up and find a secure new home for their members’ pension savings.
Stripping out the complications
It’s a complex and evolving marketplace with many legal and administrative hurdles to overcome and the consolidation process can take 12–18 months. As regulations tighten, it can be daunting to get started. After years of experience in the transfer market, we have some key learnings to share on successful consolidation.
1. Planning is key
Here are some tips that we’ve found have helped to overcome the challenges:
- Have a clear project plan for a seamless transition of assets.
- Make sure the scheme is right for you – due diligence should be carried out by both sides.
- Set dates to meet with key stakeholders to identify actions, requirements and decision makers.
2. Gear up for the legal minefield
Thorough preparation helps to avoid legal delays and obstacles. Ensure lawyers are involved early on to go through documentation with a fine-tooth comb. The following questions should be asked and answered:
- Do scheme rules permit the bulk transfer of the assets?
- Do the trustees have rights to make transfers on behalf of members, or is member consent required?
- Is consultation with active members required?
- Are guarantees or promises built into the existing benefit structure?
- Will any valuable member tax benefits be lost upon transfer?
Be realistic about timescales. Consider all the various stakeholders – sponsor, trustees, their respective advisers, legal advisers, members and the receiving scheme. These exercises don’t happen overnight, and often formal trustee meetings are, at best, quarterly.
3. Review your scheme
Trustees must strategically review their scheme and be satisfied that the transfer is in their members’ best interests. Conduct a market review, comparing your current offer with alternatives to decide whether it’s still fit for purpose. This involves checking:
- charging structures
- whether members might benefit from greater investment choice and retirement options.
4. Consider a suitable scheme
Next steps would be to weigh up alternative arrangements, for example:
- Contract-based GPPs
- Trustee buyout plans
- Master trusts
More and more, we’re seeing master trusts being favoured as a vehicle to deliver better member outcomes due to the overall trustee framework and oversight embracing all active, deferred and retired members. We’ve seen scenarios where sections of deferred members are transferred to another provider to focus on current employees and reduce administration complexity and cost.
Professional advisers would add value here, to explain and provide reassurance on the effects of charges, investment and retirement options.
5. Clean up data ahead of transition
It’s important to receive cleaned-up and accurate member data. This enables effective member communications and confidence that data is in the right shape to go to the new provider. Despite crackdowns by The Pensions Regulator on schemes’ poor record keeping, poor quality personal or scheme-specific information is still supplied, especially for deferred members.
6. Get communicating
As members aren’t usually making an active choice to transfer, clear and up-front communication is vital so that they know what’s happening, when and why. We firmly believe that a set process and plan should be mapped out for member engagement and communication.
We’re with you every step of the way
Understanding the processes and requirements are crucial – so we’ve generated a roadmap with a questionnaire to highlight the information we think trustees and sponsors need, including well-tested standard deeds and communication templates.
Find out more
Visit our webpage on ‘Consolidation of trust-based occupational pensions’ for more information.
To contact us, email RRM@bandce.co.uk or phone 0333 230 1310.