Finance Directors' Guide to Pensions

DC schemes can be structured as single trust, master trust or contract. The high level features of each are as follows:

• Single trust – trustee body made up of employer appointed and member nominated trustees. Administration and investment services can either be ‘bundled’ through a single service provider, often an insurance company, or ‘unbundled’ through separate service providers.  Single trust DC provision is sometimes provided through a DC section of a scheme that also provides DB benefits.
• Master trust – the trustee body is established by the provider of the master trust scheme, so the employer has no obligation or control in this regard.  These are multi-employer DC schemes and each participating employer has their own sub-scheme / section.  Administration and investment services are normally ‘bundled’ through a single service provider.  Several large master trust schemes were established specifically to cater for the AE mass market, e.g. NEST, The People’s Pension and NOW:Pensions.
• Contract – contract-based schemes are normally group personal pension plans or group stakeholder plans; although some are set up as group self-invested personal pension plans, as they have much more variation in investment options.  Contract-based schemes comprise individual pension contracts directly between a bundled service provider (often an insurance company) and each employee, grouped together for administrative purposes.

Regarding trends between the structures listed above, with AE having replaced stakeholder regulations, only a few stakeholder schemes are now written. These schemes may receive restricted future development, e.g. in terms of online service capability and access to the same degree of in-scheme pension freedom options. 

We have experienced a trend away from single trust schemes since April 2015, recognising the additional burden on these schemes from new minimum governance standards regulations.

Master trust schemes have recently risen in prominence, not only from the auto-enrolment providers but also with traditional bundled service providers and more recently with some pension consultancy firms entering the provider space.

With regard to the employer’s costs of operation, the charges for investment services are normally borne by members, expressed as a charge for each investment fund available (index funds typically carrying lower charges than actively managed funds).  Administration charges are often paid by the employer in single trust unbundled schemes, and met by the members in the form of the fund charge in other schemes, i.e. master trust, contract and single trust bundled schemes.  For these latter schemes, providers may be willing to accept employer fees to reduce member charges.

The formal governance and regulatory arrangements of DC schemes are as follows:

• Single trust schemes – governed by the scheme’s trustees and regulated by The Pensions Regulator (TPR).
• Master trust schemes – governed by the master trust’s trustee body and regulated by TPR.
• Contract-based schemes – governed by the provider’s Independent Governance Committee and regulated by the Financial Conduct Authority (FCA).

Legal minimum governance standards introduced from April 2015 have strengthened the governance of single and master trust schemes.  For example, trustees must undertake annual ‘value for member’ assessments of their DC schemes and review their default investment arrangements at least every three years.  The chair of trustees must report on these and a few further areas in a chair’s statement included in the scheme’s annual report and accounts. 

The Pensions Regulator expects trustees to also check the quality of their DC arrangements (including AVCs) on an ongoing basis against its DC Code of Practice.

Whilst the regulatory governance for master trust schemes will be undertaken by the master trust’s trustee body and for contract-based schemes will be undertaken by the Independent Governance Committee, we believe that employers offering these schemes still have an important governance role to play. They should assess the suitability of the scheme for its own workforce, the continued suitability of the service provider and ensure that the design and operation of the scheme meets its corporate objectives and legal auto-enrolment duties. 

Employer governance is normally undertaken by key employer roles (e.g. Finance, HR and Payroll – sometimes through a non-statutory Pension Management/Governance Committee), supported by DC consultants.

The majority of employers use DC schemes to meet their legal AE duties.  Many of the duties do not relate to the DC scheme itself but to employer processes such as:

• Identifying the workers subject to the requirements and assessing the workers each pay period;
• Communications and record keeping;
• Postponement, opting in and opting out;
• Ensuring schemes meet the quality requirements, and undertaking periodic certification where appropriate;
• Declaration of compliance to the Pensions Regulator; and
• The cyclical (triennial) re-enrolment and re-declaration duties.

With changes to the AE regulations, generally to ease the employer’s processes, governance could be extended to include review of the employer’s AE compliance and processes.  This can also be an important consideration in specific circumstances, e.g. change of scheme structure, change of key HR or Payroll personnel involved in running the scheme and corporate acquisition.

The design considerations for DC schemes include:

• Legal structure - recognising the implications between the options for governance and operating costs.
• Service providers - for administration and investment services, and whether these are ‘bundled’ through a single provider.
• Contributions - there are many options here such as fixed rates (with employees able to pay more), matching rate structures (where the employer rate is dependent on how much the employee pays – not necessarily equal matching) and grade-related rates.  Age and service-related contribution structures are becoming less common due to potential challenge on age discrimination grounds.  In addition to meeting legal AE quality standards, contribution design will ideally strike a balance between employer affordability, employer objectives (e.g. recruitment, retention) and adequacy of provision (to enable employees to afford to stop working at later ages).  
• Salary sacrifice - this allows members to make pension contributions in a tax efficient manner, normally saving National Insurance for both the employer and employees.  With AE, salary sacrifice cannot be compulsory and some employers pass on a proportion of their National Insurance savings to incentivise take up.
• Pensionable earnings - the AE quality standards (i.e. minimum contribution rates) differ depending on the pay elements included within pensionable earnings.
• Retirement options - in particular for single-trust schemes, which of the pension freedoms options to offer.
• Investment strategy - especially for DC schemes who aim to meet the employer’s AE duties, the default investment arrangement. Where the workforce includes particular groups with diverse needs, multiple defaults may be appropriate.  Recognising that defaults will not suit all members, consideration should also be given to the wider investment choices, e.g. different options for both growth and de-risking, and perhaps a limited range of core options.

An engagement strategy should deliver key messages in an accessible way, to the right people, and at the right time, thereby informing and enabling members to make appropriate choices.  An informed workforce will be more likely to value the provision offered, giving the employer a return on its benefit spend. 

We believe that engagement can often be targeted by age, for example:

• 18 to 30 – This stage is primarily about staying in.  Members should understand the importance of not relying solely on state benefits, unless say they are independently wealthy.
• 30 to 50 – This stage is about how much members need to be saving, and for members to think about what they will need to live on when they stop working.  It is a good time to bring in the experiences of co-workers and peer groups.
• 50+ – This stage is commonly the first point in time members begin to think about taking benefits.  The importance here is to make members aware of their options (increased with pension freedoms) and how they can still influence the outcomes for retirement income.  

Another group that may require targeted engagement is senior employees that may be impacted by the Lifetime and Annual Allowances. 

In addition to the traditional forms of communications, technology is increasingly important in delivering more effective engagement, from analytical tools to help understand the workforce in more detail to online tools in delivering education and modelling.