Strategic Pension Review
Background
XYZ Limited is a manufacturing company employing c450 people of whom c200 are included in workplace pension arrangements. XYZ has a frozen final salary scheme (FS Scheme) to which it is paying deficit reduction contributions, and two defined contribution (DC) arrangements - a trust based contracted-in money purchase scheme (CIMP Scheme) with some 50 active and 250 deferred members, and a group personal pension scheme (GPP Scheme), inherited via a recent acquisition with some 150 active members.
The CIMP Scheme is a “master trust” arrangement run by an insurance company and has funds invested in a “with profit” arrangement and a member annual management charge (AMC) that varies according to member age and contributions. Annual “trail commission” is payable to the broker firm that set up the CIMP Scheme who is no longer providing any advice or services in relation to the arrangement. Initial commission was also paid when the Scheme was set up.
The GPP Scheme provider is also an insurance company and the Scheme was set up on a direct basis (i.e. without an intermediary or commission payment) offering a wide investment choice, (including a lifestyling default for those that cannot decide their own approach), and an AMC set at a 1% (stakeholder) level.
Whilst there is a longer term strategy in place for the FS Scheme (follow this link for further de-risking information) the same cannot be said for the DC arrangements where the company’s concerns centre on the impact of compulsory employer contributions (auto enrolment) and the duplication / inefficiencies of having multiple schemes. The company is also receiving a high volume of calls from corporate IFAs proposing to “re-broke” their DC arrangements.
Strategic review and conclusions
Following a due diligence exercise to establish the documentation, facts and data in relation to both the DC arrangements and the company’s employees, and a full review of the options (and associated costs), the following strategic conclusions were reached:
• To retain the GPP Scheme, amending its terms such that it would meet the compulsory employer contribution requirements at the company’s staging date (follow this link for more information about auto enrolment).
• To renegotiate the GPP Scheme AMC as it is out of line with terms offered by other providers (and to allow for increased membership as the company’s sole ongoing scheme).
• To wind up the DC CIMP – this old fashioned contract did not meet the requirement for a modern, transparent arrangement offering a broad range of investment choices (to suit differing members' needs) at a competitive price.
• To offer the active members of the DC CIMP membership of the GPP Scheme, with a transfer of benefits if the member so elects.
• To pursue a compulsory buy-out (known as a Section 32a buy-out) of all benefits remaining in the DC CIMP after the expiry of a window for voluntary transfers out.
• To introduce salary exchange for members on an individual “opt out basis” resulting in a substantial employer NI contribution savings, as well savings for employees.
• To introduce a Governance Committee charged with ensuring the GPP Scheme continued to meet member’s needs and ran efficiently (follow this link for more information on scheme governance). (As a point of interest the GPP Scheme provider administration ran smoothly unlike that for the DC CIMP).
In formulating their strategy the company decided not to offer NEST (follow this link for further information) as a choice to meet the auto enrolment requirements principally driven by the desire to have only one scheme to deal with and the fact that they already have their own arrangements in situ.
Consideration was also given to the option of offering employees access to a “corporate wrapper” offered by the provider. This wrapper could provide members with access to a corporate ISA, direct share investment dealing via a Group Self Invested Pension Plan (GSIPP), various voluntary benefits and access to a flexible benefits platform. The company concluded that this was a level of sophistication beyond their current needs but that the Governance Committee keep the matter under regular review.
And how was the advice paid for?
The company considered the options of how to pay for the corporate advice required: either via a fee or having a broker take commission from the GPP Scheme. Their preference was to pay a one off fee because:
• It was transparent and quantifiable and directly related to the advice required
• The advice required was strategic and primarily for the benefit of the company
• It was in the members’ interest - if commission were paid this would have been reflected in a higher AMC deduction applied to members’ funds
• The commission payable was not correlated with the level of advice required and could continue for as long as the GPP Scheme was running.
The company was also surprised to learn that substantial commission had been paid on the set up of the DC CIMP (it having been set up before full disclosure requirements were in place).
And finally the Retail Distribution Review (RDR)
RDR comes into effect in 2012 and in essence means that commission that hitherto has been paid on setting up schemes (initial commission) will be outlawed. Corporate IFAs will need to change their business model to a fee charging basis but a Defaqto survey of 501 advisers in the Financial Times last year indicated that only 7% are fee based!
The Financial Services Authority has indicated that it will not tolerate “churning” (the changing of providers simply to generate commission) as there is a real fear of this happening pre RDR.
The company now appreciates why it has been getting so many offers to review / re-broke its schemes!
