Many smaller DC schemes are thinking about switching to a mastertrust arrangement, but what should they prioritise and where are the pitfalls? Sara Benwell speaks to one scheme that’s made the change to find out what lessons can be learnt.
Plagued by poor administration and with a DB buyout around the corner, the Pensions and Lifetime Savings Association started to question the wisdom of running a trust-based DC scheme in house.
Graham Vidler, director of external affairs at the PLSA and a trustee of the former DC scheme explains: “We decided that we wanted to change our provider as a result of some persistent administration problems.
“It seemed to us that we could get a much better result for our members by bringing in a more professional trustee than we were able to deliver in house, so we decided to look in the mastertrust market for our next DC solution”
Who to consider
Having made the decision, the next step was to hold a beauty parade. Vidler says: “We then looked around the market for mastertrusts which might be able to meet our needs. We looked at things like our own Pensions Quality Mark standard and the mastertrust assurance framework to assure ourselves that all the schemes we invited to tender were of the highest possible quality.”
It was very straightforward to find mastertrusts that could accommodate our structure”
The shortlist of providers was then invited to meet with the team to explain their proposition and help the PLSA understand what support would be available, both for the organisation and for members.
Vidler says: “Oviously it was quite an interesting dynamic for us because they were our members pitching to us to become our scheme of choice, so we were seeing people in a different light to how we normally see them, but that aside we were really impressed with the quality on offer. Really high quality presentations and willingness to answer our questions. And most importantly good, solid propositions.
“The one challenge we had was we couldn’t consider NEST as part of our process because the annual contribution limit that they have until next year would have bitten on many of our staff given our generous contribution rate. But other than that it was very straightforward to find mastertrusts that could accommodate our structure.”
Choosing the right scheme
The lobby group focused on two main areas when deciding which provider to appoint – member servicing and employer servicing.
On the member servicing side the trustees wanted to understand what the investment options were. In particular, they were looking for a clear expression of the default strategy and what it was trying to achieve. They also wanted to understand how different providers were flexing their default arrangements and how they were responding to the pension freedoms.
Price was another factor and the board was also looking for evidence of tools that staff could use to check and manage their pensions accounts.
Once a provider had been chosen, the PLSA then faced the somewhat daunting task of transferring all the members across.
However, Vidler says the process was relatively straightforward. He explains: “We found transitioning really straightforward. We had a named relationship manager who helped us through the whole process, it was clearly a process that they’d done dozens if not hundreds of times so they knew how to do it. They were very open to accommodating our particular circumstances, so that all went really well.
The one thing that’s proved difficult is transferring across members from one scheme to another”
“The one thing that’s proved difficult – and I’m sure this will be a challenge for many schemes out there making the same transition – is transferring across members from one scheme to another because you bump up against a set of regulations that, in many areas, have been written for the old world of DB rather than the new world of DC.
For example, there is a requirement to have an actuarial certificate stating that if members were transferred they would be receiving broadly equivalent benefits.
“That’s a concept that makes a huge amount of sense in DB,” says Vidler. “But we found it very difficult to understand what, if any, value that was adding to the process of transferring from one DC scheme to another. In fact, all we felt it did was slow down the process and add some unnecessary cost.”
This regulatory hurdle means that all the PLSA members currently have two schemes until the paperwork can be sorted to transfer their old pots across. The process has proved so frustrating that the PLSA will now be lobbying the government to ensure the rules are fit for purpose.
Getting communications right
One challenge the organisation faced was communicating the changes to members – and Vidler recommends that other schemes going through the process take full advantage of the help that their provider can offer.
We have a broadly 50-50 split between people who are engaged in the detail of pensions policy and people who aren’t”
He says: “Although we’re the Pensions and Lifetime Association we have a broadly 50-50 split among our staff between people who are engaged in the detail of pensions policy day to day and people who aren’t. So we needed to approach it with an eye on that.
“Work with your provider around building a communications plan because we found they know how to do it in a variety of different circumstances and could help us tailor our communications to our particular audience. The thing we found really helpful was the way they talked to members about things they had to do such as nomination of beneficiaries forms, things they could do such as choosing an investment option other than the default and things they had to think about such as how much money was going in.”
According to Vidler, members were happy to hear about the switch, particularly when it was explained that they’d benefit from better administration and a better ability to view what was going on with their pension pot within a broadly similar charge level and with similar investment options.
Now that the scheme is in place the focus is on constantly reviewing it to ensure that it is working for members.
Vidler concludes: “It’s a topic that comes up in frequent discussions amongst our executive committee and our board watches the implementation of the new scheme very carefully over the cycle of its meetings. We will use those structures to review the scheme on an ongoing basis.”