The Hidden Costs of Poor AVC Management and How to Avoid Them

Improve AVC outcomes: Reduce hidden costs for members and trustees

Additional Voluntary Contributions (AVCs) often take a backseat in pension scheme management. But poor oversight and governance can lead to hidden costs that impact both you as trustees and your members.

The risks of poorly managed AVCs and their hidden impact

Many trustees assume that leaving AVCs untouched avoids unnecessary costs. In reality, failing to actively manage AVC arrangements results in significant hidden costs. The true cost of AVC mismanagement isn’t just about high fees. While members often pay an Annual Management Charge (AMC) of 0.75% per year or more, the hidden costs (both financial and operational) can be far greater. Employers, trustees and members all feel the impact, yet these issues often go unnoticed until they become a serious problem.

How legacy AVC arrangements undermine member experience and trustee efficiency

For members, outdated AVC platforms mean limited investment choices, weak returns and a frustrating experience when trying to access their benefits. At retirement, they may find that their provider offers minimal flexibility, making it harder to arrange their retirement benefits effectively. Poor engagement and lack of transparency leave members disconnected from their defined contribution pension, increasing the risk of bad financial decisions. ESG (Environmental, Social, and Governance) factors are also often overlooked in legacy AVC arrangements, meaning your members may be stuck in investments that do not align with their personal values or modern sustainability standards.

As trustees, you also bear the brunt of poor AVC management. Despite AVCs often making up a small proportion of scheme assets, they still come with significant governance responsibilities. You are expected to oversee performance, manage ESG considerations, and handle member complaints, including Internal Dispute Resolution Procedures (IDRPs). Poor administration leads to an increase in complaints and IDRPs, consuming valuable time and resources. When AVC providers withdraw from the market, as Santander did in 2024, schemes are forced to scramble for a replacement; adding further time, cost and disruption. Many providers have also invested little in AVC platform development, leading to inefficient legacy systems that create ongoing headaches for you as a trustee.

Employers, too, can face unexpected costs. AVCs can become a major obstacle in buy-outs, delaying transactions and increasing expenses due to poor-quality data and legacy administration issues. A seemingly small AVC arrangement can derail an otherwise smooth de-risking process, making early planning essential.

Why consolidating AVCs leads to better value, compliance and governance

Addressing these hidden costs starts with rethinking how AVCs are managed. Consolidating AVCs into a modern, well-governed solution removes inefficiencies, reduces governance burdens, improves Value for Money (VfM) and enables your members the opportunity to receive better outcomes. This approach provides stronger ESG integration, fewer IDRPs, and a better overall experience for all stakeholders. A proactive approach today can prevent costly complications in the future.

How we can help

At Dalriada, we understand the unique challenges trustees face when managing legacy AVC arrangements and we know how to fix them.

Our Defined Contribution Consolidator (DCC) model is designed to eliminate inefficiencies, reduce risk and deliver better value for both trustees and members. With our governance framework and technical expertise, we help you regain control of AVC management before it becomes a burden.

We partner with you to:

• Review and assess the effectiveness, costs, and risks of your current AVC arrangements.
• Consolidate AVCs into a modern, well-governed and future-proof solution tailored to your scheme.
• Ensure compliance with evolving regulatory requirements, including the Pensions Dashboard.
• Enhance member outcomes through improved investment options, ESG integration and better engagement tools.

Stop hidden costs from chipping away at member value and trustee time. A short conversation today can help avoid major issues tomorrow.