A 30 second guide to trust-based DC schemes
Management quality: varies, depending on quality of trustee board
Employer involvement: high
For employers who prefer a DIY approach, an alternative to GPPs is a trust-based scheme run by the company itself. A trust-based DC scheme is backed by the employer and run by a trustee board on behalf of the members. The trustee board is a separate entity from the employer, but will typically be comprised of senior staff from the company as well as at least one member of the scheme and possibly a professional trustee.
The trustees are responsible for setting the investment strategy for the scheme, including the default option, as well as making sure that the scheme is run efficiently. This is certainly a much more labour-intensive (and expensive) approach than a GPP, but gives the employer complete control over the scheme.
To date, a significant difference between trust-based and contract-based DC has been short service refunds. In a trust-based scheme, an employee who leaves the company within two years can have their face-value contributions refunded – and the employer can also reclaim the contributions it has made for that employee. In a contract-based scheme the same rules do not apply.
This difference is unlikely to remain in place for much longer. Pensions minister Steve Webb has been very vocal in his ambition to remove it and, although there is no legislation yet, there may well be in future.
“There have been lots of headlines around short service refunds, but they have not been the key driver of interest in trust-based schemes,” says Paul Bucksey, head of DC business development and client relations of BlackRock. “Interest has been more around the ease of communication that trust-based schemes give over contract-based.”
Trust-based schemes: Pros and Cons
- › This is the best approach to ensuring you get a scheme that is exactly right for your company
- › For larger organisations with legacy defined benefit schemes, a joint trustee board may run both schemes, which can give consistency of approach.
- › Trustees are able to build and maintain a default fund that is very closely tailored to their membership.
- › Trust-based schemes can be expensive to run, as the trustee board will need to be supported by advisers, lawyers and other pension professionals.
- › Although it can be convenient to have a single trustee board for a defined benefit and defined contribution scheme, the DC scheme can easily be relegated to the sidelines.
- › Trustee boards need to meet regularly and this can eat up time for senior staff in particular. All trustees will also need to ensure that their skills are current
- › For small and mid-sized employers, it may be difficult for trustees to negotiate well-priced deals with providers, advisers and fund managers because they are small scale.
Key questions to ask when considering a trust-based DC scheme
- Does our organisation have the time and resource to set up and maintain a trustee board, including gaining and maintaining appropriate knowledge for the trustees?
- Can the trustee board be confident it can offer the best outcomes for the member, in terms of member charges and fund design?
- Will the employer be able to maintain an on-going commitment to a trust-based scheme?