Is this a case of good governance being a bad idea?
6th November, 2014
I have read, and re-read Code of Practice 13 and the associated Regulatory Guidance in the hope of finding some triviality exclusion for those small AVC Schemes attached to DB arrangements.
First and foremost I am 100% in favour of the Quality Features for stand alone DC arrangements. I think these have been needed for a long time to provide greater control over the DC landscape. Where Trustees achieve compliance with the Quality Features, this can only help provide better member outcomes. However, for the AVC section of a DB Scheme I struggle to see the need for full compliance. If we consider your standard small DB arrangement (without a DC Section), then this will often include a handful of DC AVC members whose pots (even if combined) would struggle to exceed the triviality limit. Yet, they must be managed with the same rigorous requirements as a 100 million pound arrangement even though these benefits are a mere fraction of the overall member pension package.
It is clear when commencing the review exercise that the cost is fairly standard regardless of size of membership. So the cost for reviewing a DC Scheme with 500 members is very likely to be similar to the costs of reviewing a Scheme of 10 members. All the checks involve process and systems, and therefore you must ask all the same questions, contact all the same people and, if necessary, pay the same Regulated Advice charges. The days of commission are gone, so the fund size is pretty much irrelevant to your adviser.
This takes me onto the Regulator’s review of DB costs. The survey carried out created some eye watering cost per member ratios. The small AVC sections discussed in this article will see these costs exacerbated. The modern Trustee would welcome some freedom to spend their annual governance budget on the areas which most suit the needs of the Scheme. Whilst the initial review may have strong merits, the annual recertification will be viewed by many as a “tick box” exercise, which I am sure is not the Regulatory intention.
My main concern through all this is the knowledge that most legacy AVC Schemes will not pass the majority of the Quality Features. The communications tend to be poor and dated, the investment choices limited and charges mixed. However, the providers have no appetite to engage with these products as they are being wound down and moved towards their new offering. As Trustee we know the new offering is better value but we cannot move it without taking / paying for investment advice.
Notwithstanding all this, I remain comfortable that scheme members are not getting a particularly raw deal. Most DB arrangements allow the members to offset their AVC funds against Scheme PCLS. This facility allows members to reduce the impact of generally unattractive scheme commutation rates – assuming they always intended to maximise PCLS. I am not a financial adviser, but I cannot think that this is not a fully advantageous position for the member.
I believe the disproportionate costs of these governance reviews and annual certification will lead to Employers attempting to engineer the partial wind up of the AVC arrangements. I have already spoken to a lawyer on this topic who had quoted for similar work recently – and I assume this is not an isolated instance. I do not believe that the severing of the AVC tie is in the long term interests of the majority of members.
I would welcome a statement from the Regulator regarding the DB AVC position in advance of January 2015 to give the DB market some guidance on how to tackle this issue from a proportionality perspective.