Sometimes trustees may need to move funds without member consent, Helen Ball examines how they can minimise the legal risks
Trustees sometimes need to move their DC funds without member consent. This happens when, for example, one or more of a scheme’s current investment options are no longer available or suitable, or when trustees decide to change their investment provider or platform. It also occurs when schemes transfer or merge into a different arrangement, such as a master trust, or when trustees wish to consolidate their DC AVC arrangements.
Although this can be worrying if the new investment decision will override a member’s previous investment choice, trustees can minimise the legal risks involved, provided that the right process is followed.
There are four key stages which are usually involved in this kind of exercise:
This stage involves agreeing the objective of the investment review by the trustees. However, it is very important to consider the context of that review. For example, is this prompted by charge cap concerns, investment performance, or wider changes such as the introduction of pension flexibility options or alterations to the scheme’s structure? It may also be helpful to seek the employer’s support at this stage, as there could be costs and communication issues generated from any resulting change..
During this stage, the trustees need to seek investment advice on their options and obtain a formal advice letter from their investment adviser. It is also important that trustees consider legal advice on the trust deed and rule provisions. In particular, do they have power to make the change without member consent and, if so, would it be in members’ best interests to exercise such a power? Finally, trustees need to assess the impact on the statement of investment principles. If this needs to be amended, trustees must first consult with the employer.
This involves considering the advice received. The trustees weigh up whether the proposed change is in the best interests of members. For example, would there be any transition costs for members? What would happen to any members who are part way through a lifestyle process? The trustees then document their decision and reasoning appropriately, as required by the April 2015 governance legislation.
During the last stage, the trustees issue member communications as well as instructions to investment managers and administrators. The statement of investment principles must also be updated.
We anticipate that this kind of exercise is likely to take place more often in the future given the legal requirement to review default arrangements every three years. Trustees should not feel constrained by previous investment choices if they receive advice which suggests that changes are required. What is important in this process is to make sure of the legal position early on and to approach such an exercise in a sensible and measured way.
Helen Ball is partner and head of DC at Sackers