Issued: May 2009
When talking about defined contribution (DC) pensions, both types, at their best, do the same thing – provide a good risk-managed return for members’ and employers’ money.
In trust-based schemes, trustees take decisions on investment funds and are administration providers for your members. In a contract-based arrangement (such as a Group Personal Pension (GPP) or Stakeholder), the employers choose a single, off-the-shelf solution.
Contract-based approaches are low cost and regulation-lite from employers’ perspectives. Whilst they look low-risk to employers, there’s growing concern in the sector that many employers neglect the governance of their scheme, hoping that a little due diligence at the selection stage will do the trick.
But, what if the administration is disastrous? Or the provider’s funds perform dreadfully? Will anyone even tell you?
Well, this is where a trustee would act. It monitors the performance of the administration and investments (and their managers) and will change these. It takes appropriate advice and acts in the best interest of its members – your staff. There’s no such champion in the GPP.
So with this compelling justification, why do so few advisers advocate the trust-based approach? Well, the cost and hassle of setting up and maintaining a trust is prohibitive and finding and training trustees isn’t at all easy. The GPP option is often taken. If you take this option, you must, at the very least, review the arrangement every year or two. Costly, but necessary (and it keeps our friend the adviser busy).
A growing number of employers recognise the benefits in having the best of both worlds (something which is low cost/hassle, but considers members’ interests).
If you prefer the contract-based approach, you can fill that Trustee gap with an internally organised governance arrangement. Sounds like hard work and it is – another Managing Committee! But it can deal with any investment problems and poor service standards and can give your staff a representative voice. Essentially, it can help solve problems before they become industrial relations crises or receive the unwanted attention of the Pensions Regulator!
If you prefer the trust-based concept, but can’t afford the cost and hassle (the vast majority of you?), then you can join a trust-based multi-employer DC scheme. These schemes offer all the benefits of low-cost efficient administration and investment (like a GPP), plus the reassurance that providers are appointed and monitored for the benefit of your members. Every employer in the country can access at least one of these schemes and in 2012 there’ll be another one. It’s no coincidence that Personal Accounts will use the trust-based multi-employer approach.
Ultimately, your choice is likely to reflect your size and your culture. Before you decide, think about these and how you can achieve the best approach. Just don’t forget your members – or the Regulator.