The economic fallout of Covid-19 could cause serious problems for unbundled DC schemes, thanks to a lack of regulation.
Salvus Master trust has warned of a “ticking time bomb” in the sector, leaving some schemes and members in a vulnerable position.
There are more than 1.1m members in these DC schemes. Typically they have been set up by employers to provide a framework for regular pension savings, with a Board of Trustees providing a layer of oversight and governance. However this governance comes at a cost.
The main risk highlighted by Salvus is a lack of mandatory reserves to ensure that members pots are not eroded in the event of a wind up.
Salvus head of sales Bill Finch says many employers are facing increasing financial pressures due to the Covid-19 pandemic and resulting lockdown. He adds that this threat could be further exposed as we move through the current crisis.
“The lack of reserves available within unbundled DC schemes is leaving both the schemes and their members in a highly vulnerable position.
“Winding up a pension scheme requires significant spend to cover the cost of essential fees like legal advice, member communications and administration, as well as the TPR levy.
“But unlike the Master Trust community that is obliged to hold reserves, contract-based schemes that protect members by design, or defined-benefit schemes which the PPF is designed to protect, unbundled DC schemes and their members have no lifeboat to rely on.”
He adds: “Without sufficient money set aside to cover these costs the only assets left in this scenario would be member pots, or maybe a non-allocated account to pay the wind-up fees. It is important that people know how much they may need to accommodate these elements as, for some, this figure could be many hundreds of thousands of pounds — a significant amount for most employers and trustees.”
“We have seen a number of high-profile company failures in the last few years especially in the retail sector, and we believe that unbundled DC schemes are particularly at risk should a sponsor fail, as many won’t have considered where the money to cover the cost of winding-up the scheme will come from.
“Trustees should consider the financial position of their sponsor and the potential risk posed to members, especially now with so many firms facing challenges in the current environment.
“Introducing regulation that means unbundled DC schemes must adopt some or all of the Pensions Scheme Act 2017 regime would be the sensible approach but, in the meantime, it’s worth employers considering alternative routes such as master trusts or contract-based schemes that may help safeguard member benefits.”
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