AVCs - is it time to let them fly the nest?
9th June, 2015
In 1988 the Government introduced Personal Pension Plans and with them Free Standing Additional Voluntary contributions (FSAVCs), which allowed members of Defined Benefit (DB) Pension Schemes to increase their pension savings outside of the DB Scheme. Pension flexibility was born but definitely not a favourite child!
Over the years FSAVCs stayed in the background with Scheme AVCs more popular with members. Trustees had no option, under legislation, other than to provide a vehicle for members to increase their contributions. All well and good, I hear you say, but the issue has always been the governance of such schemes. The funds accumulated in AVC contracts are assets of the DB Scheme. Trustees are responsible for choosing the AVC vehicles and the funds into which members contributions are invested (ignoring added years as these are a different issue) and need to review these regularly, checking that the investment funds remain suitable; the performance of the funds is still acceptable and that the charges levied on the contracts are reasonable. Given the number of contributors relative to the size of the AVC vehicles this is a very expensive exercise and is often an area of governance which is overlooked, particularly in closed DB Schemes.
From April 2006 (A-Day) contributing members of occupational pension schemes were also permitted to contribute to Stakeholder and Personal Pension Plans. This was the last nail in the coffin for FSAVCs but Scheme AVCs remained available. With the arrival of the new pension flexibilities, at long last, Trustees no longer need to make AVC vehicles available to members and may want to consider whether they should retain them in the Scheme at all. The disproportionate cost of maintaining these vehicles could even be considered as disadvantageous to non AVC members, sucking up money which would otherwise go towards funding the Scheme.
The Pension Schemes Act 2015 (‘Act’) amends the statutory right to transfers from Occupational Pension Schemes (‘OPS’) so that members (from 6 April 2015) have a statutory right to a partial transfer value. This will allow members to transfer their money purchase AVCs out of DB Schemes while leaving their main scheme (safeguarded) DB benefits untouched. As AVCs are flexible benefits, the new requirements on Trustees to ensure members have obtained relevant financial advice on transfers of £30,000 or more, is not applicable.
Communication will be key here – with so much going on in the pensions world, your ordinary scheme member could be forgiven for not having a clue what any of it means for them. Holding their hand through the transfer of AVCs might well be a good investment for the Trustees, and Employer.
THIS ARTICLE WAS WRITTEN BY A FORMER MEMBER OF OUR TEAM.