Jack Jones talks to Skip McMullan about his 26-year involvement with the Bank of America DC scheme

The Bank of America pension scheme was perhaps the first major fund to switch from defined benefit to defined contribution, making the leap in 1990. It is also now one of the biggest with the firm’s employees holding more than £1.5bn in DC assets.

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The fund has come a long way in 26 years, and its trustee chairman Skip McMullan believes other schemes can draw plenty of valuable lessons from its experiences.

ADMIN NIGHTMARE

“The bank established a DC scheme quite simply because it wanted to manage its future cost of providing a pension scheme to its workforce in the UK,” he says. “Like many other firms at that time they realised that DB schemes were going to become more and more onerous from the employer’s point of view.”

But the decision was also informed by some traumatic experiences the scheme had gone through with its DB administration.

We’d just had the most horrendous experience of administration errors”

“We’d just had the most horrendous experience of administration errors,” says McMullan. “When you go through that, you never want to experience it again in your life. Correcting member administration errors is a nightmare. At one stage we were employing three different firms of accountants to put things right.

“With investments – particularly DB investments with an employer covenant like we had – by and large you can put things right when they go wrong. But putting things right on the administration side is extremely painful, and can be extremely time consuming and expensive.”

This artcle was taken from our special Pioneers of DC edition of Pensions Insight.  For more case studies of some of the most well-established DC schemes, read the full issue here.

McMullan is keen to highlight that this is the fundamental role of the trustee – they are there to make sure that member benefits, in accordance with the trust deed, get paid in full and on time. Making a fresh start with a DC scheme  gave the fund the chance to put its administration woes behind it.

DC 2.0

Having helped to set up the scheme, McMullan took a step back, but he got involved again in the early 2000s, first as a member-nominated trustee, then as an employer-nominated trustee, and finally as trustee chairman.

On returning to the scheme, he set about making some big changes to its investment options, administration platform and member engagement.

“I saw the whole thing was not fit for purpose,” he says. “So I decided to make some significant changes. That was driven by my experience of working in a major financial institution and having run the financial institution’s business for a number of years before that. I realised that what was going on in the scheme was archaic, and that we could do a lot better, so I needed to find and assemble the bits and pieces to do that.”

I saw the whole thing was not fit for purpose”

The first major change was to the investment options on offer. The scheme had more than 40 different investment choices, many of which were closed to any further investments because they were no longer suitable. But as long as they remained on the platform there was a possibility that contributions could find their way into them.

“So one of the big changes we wanted to make was to reduce the number of funds down to around 20, with a mixture of active and passive and a mixture of self-select or lifestyle investments,” says McMullan. “At that stage we went to Watson Wyatt to work on a gateway concept where everything went to a white label. That meant we would simply tell members ‘this is what it says on the outside of the tin – this is what you get,’ but we could take funds in and out without having to go back to members for their approval.”

The second significant development involved switching to an administrator that offered straight-through processing. As a major financial institution this was a feature that employees had begun to demand.

Thirdly, the trustees moved to an online platform that delivered some of the capabilities members had come to expect. “We absolutely wanted to have a platform on which members could see their funds on a real-time basis,” says McMullan. “In other words, we didn’t want any funds on the platform that didn’t have daily pricing.

“We wanted members to be able to see every day what their funds were worth and we wanted them to be able to switch one day and see the results the following day.”

This project started in 2003 and as technology has improved, the fund has upgraded its online offering. McMullan believes the capabilities it offers through its consultant Willis Towers Watson, are among the best around.

GOVERNANCE

These kind of changes would not have been possible without exceptionally high levels of governance, according to McMullan.

“If you have a good structure it makes the governance aspect so much easier,” he says. As an example of this rigorous oversight, the scheme checks the progress of member contributions, from the moment they are deducted to the point they are applied to their individual account.

“We use Silver Wolf to do that on a monthly basis,” says McMullan. “Everything reconciles to the penny every month – that’s the level of detail we go into to make sure everything is right.”

If you have a good structure it makes the governance aspect so much easier”

The trustee board is also made up of a good mix of people, with the skills required for running a major financial institution.

McMullan explains: “When you look at what the regulator is doing now with chairs’ statements – we’ve been doing that for years. There is a self-assessment and an external assessment of the board every year, and they all have trustee training and understanding and they all sit PMI qualifications as time goes by. It is unacceptable to me to have people looking after more than £1bn of members’ money if they are not committed to doing it.”

AUTO-ENROLMENT

But the advent of auto-enrolment brought another big shake-up. The bank – which acquired Merrill Lynch in the financial crisis of 2007-8 – looked at both organisation’s principle schemes to decide if either met the criteria.

The fact that the Bank of America scheme had matching contributions, while the Merrill Lynch scheme had a straight contribution structure based on age and length of service made the latter scheme more suitable.

This artcle was taken from our special Pioneers of DC edition of Pensions Insight.  For more case studies of some of the most well-established DC schemes, read the full issue here.

“So we based the main scheme in the UK on the Merrill Lynch scheme, but we changed the old Merrill scheme to look like the old BofA scheme. Then we moved all of the active, deferred and pensioner members out of the Bank of America scheme, other than those who had some kind of wrinkle – an A-day, or GMP or an internal annuity conversion scheme – that made it difficult to work out how much it would cost to buy out the member’s interest,” McMullan says.

That doesn’t mean it’s a small scheme though - the Bank of America scheme still has approximately £270m of investments. The new Bank of America Merrill Lynch scheme, though, is a monster – with £1.3bn of assets, and £16m of contributions going in each month. But with the work that went into making its predecessor fit for purpose, its members can be confident that their retirement savings are in safe hands.