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Helen Cracknell, Solicitor, Burges Salmon

Hello everyone, my name's Helen Cracknell and I'm a solicitor in the Pensions team. Welcome to episode four of the Burges Salmon Pensions Pod. Previous episodes have looked at disclosing information to the regulator, getting prepared for the regulator's new powers and how pensions law and charity law interacts. If any of that sounds of interest, be sure to look at our website.

Chris Brown, Director, Burges Salmon

And I'm Chris Brown, a director in the Pensions team. In today's podcast we will be discussing key trends in the current pension’s landscape, with a particular focus on DC transfers to master trusts.

Our guest today is Charlotte Osmond, a senior associate in our Pensions team, hello Charlotte, who has particular recent experience of working on scheme design projects and buy-ins. Charlotte, welcome to the podcast.

Charlotte Osmond, Senior Associate, Burges Salmon

Thank you very much for having me

Chris

Charlotte what are the headline trends in the future of pensions?

Charlotte

So there are several key trends I thought it would be useful to talk to you about today. Firstly on the define benefit side, perhaps stating the obvious, but money schemes are working towards their own game. More and more schemes are choosing to close the future accrual, and many are deciding to buy-in and wind-up and indeed I have been working on a number of buy-in and wind-up projects in recent times. The regulators published a report last year which looked at some statistics behind the number of schemes, and this looked at about 5600. According to the report 47% of schemes are close to future accrual. 10% are open to new members. 40% are closed to new members, and 3% are in winding-up and this really interested me because I thought a lot more schemes would be closed to future accrual than they're actually were, so yes that was very interesting.

Chris

Yes that is interesting, but perhaps the schemes that are still open to accrual there's only 10% open to new members, so there's maturing market and of the mature schemes we're seeing I think, fair to say, we're seeing lots of activity in the insurance market at the moment. Late last year I completed, there was about 45 million buy-in other schemes liabilities because the employers overseas parent, it was a global group sponsor, wanted to contribute money to the UK pension scheme by the year end to effectively take UK pension scheme liabilities off its books, so we worked to an accelerated time scale to get the buy-in deal done by the end of 2021. I don't think that's such an uncommon thing we're seeing at the moment, working on a number of buy-ins at the moment.

Helen

Definitely Chris. I feel like we've ramped up in recent years, lots of different buy-ins and buyouts I'm involved in at the moment. I just think, Charlotte, picking up your figures it's so interesting that that means that the majority of DB schemes are still open to accrual because that's not a trend that I would have thought.

Chris

Yes so whilst we've got a maturing market there's still you know still schemes that are that are yet to reach full maturity, or you know a very mature status.

Charlotte, what other trends are we talking about at the moment?

Charlotte

So another trend is definitely defined benefit super funds, and as you all know the Clara Pensions was the first super fund to meet the regulator standards at the end of last year. So this means they can start accepting transfers, and taking a little bit of a step back, super funds are schemes designed to consolidate DB assets and liabilities, and this is generally for unconnected employers, so all the assets and liabilities will be put into a single pension arrangement, and if a super fund has gone into then this will break the link between the original employer. So this means that the scheme might be able to benefit from the covenant of the original employer and also the ongoing contributions of the company. And this very much means that member security will be relied upon from a capital provided by external advisors, and these investors will hope to reach a profit in due course.

Helen

So these super funds can be seen as a win-win really, so in the right circumstances the idea is that the member gets the benefit from being in a larger scheme with an increased chance of full benefits, while the employer itself can walk away from its pension’s liabilities. So, Charlotte, do you think these will take off in the market?

Charlotte

Well I'm certainly no Mystic Meg but I definitely heard rumblings in the industry that these could take off. At present the DWP is aiming to settle its vision for the future regulation of super funds, and I also note that the regulator published his interim view for super funds in June 2020 and updated his gateway principles in October last year, and this is very much for schemes that are considering consolidation and will help to ensure the market develops in the control manner before legislation is introduced. And also interestingly, in May last year the regulator put super funds on its first year's agenda of its three-year plan. So I think it's very much watch the space for this year.

Perhaps an alternative to buy-ins in the future or pension protection for an entry and there's also other capital-backed options that are coming through in the market too.

Helen

Thanks Charlotte, I think that Clara being the first super fund is a big step forward, as it gives another options to employers and savers and it is innovative. Also trustees could take some comfort that the regulator considers that Clara meets its standard, which is a powerful message but it's also worth reminding trustees who are listening that they still need to do their own due diligence when choosing a provider.

Chris

Yes absolutely I think you're right that it's important for trustees to come to their own decisions on solutions for the scheme, but certainly anything that, as you say Charlotte, anything that improves member options and gives another solution has got to be a good thing for the market and I've certainly had clients asking you know for information about Clara and how super funds and things like that work so yes extra options for the market is definitely a good thing and I think there is potential for these to take off. But leaving that aside, now over to the main thing we wanted to talk about for this episode, so Charlotte what about trends in the DC world?

Charlotte

So there is definitely a clear trend on the DC side for schemes to go into master trust and I have been working on a number of projects in recent times and I've seen this happening and I think again this is very much a trend that is set to continue and yes we'll be talking about this later on as well about collective DC schemes.

Helen

Well, collective DC schemes, Charlotte could you explain what they are for our listeners?

Charlotte

Yes so this is a new type of trust based scheme, there's very much a halfway house between defined benefit and defined contribution.

So it works so the member will place contributions into the arrangement and the employer will put in contributions as well. This will then be invested and pooled with other member contributions and the member will receive a pension when they come to retire. 

However this pension will not be guaranteed and it could be higher or lower depending on how investments are done, so this deviates from the traditional DB model where individuals are guaranteed a pension and potentially more employer contributions would be required. 

So collective defined contribution schemes were covered in the Pension Schemes Act 2021 and in December last year the DWP published its response on the consultation on the regulations and this came along with the final regulations as well and we are expecting this to come into place in April this year.

Helen

There's certainly been a lot of movement in this space but, Charlotte, do you think these will take off in the market and be an option for members?

Charlotte

Well yes definitely but I do think it's harder potentially on small arrangements where it might be more difficult to benefit from investment pooling, but I can see potentially taking off on an industry-wide schemes or through aggregator models that could be set up. It could also potentially be an option for the public sector, if the government had an appetite to do this so again I think this is very much watch this space.

Chris

Well thank you Charlotte, that was a really helpful summary of collective defined contribution schemes, but today we want to focus the podcast on a master trust, specifically DC master trusts, could you remind our listeners please what a master trust is?

Charlotte

Certainly Chris, so a master trust is an occupational pensions scheme that generally provides defined contribution benefits and usually for unconnected employers.

Helen

Thanks Charlotte, I've definitely seen more and more of my clients wanting to move their DC sections into a master trust, wanting to explore that option. Just for our listeners the benefits include economies of scale for members and also the fact that they're dedicated DC trust schemes so therefore removing the ever increasing DC governance requirements for trustees. What kind of legal issues do you typically see and how can they be overcome?

Charlotte

So I very much consider this from a trustee perspective if a sponsoring employer puts a proposal to the trustees, and the considerations will depend on whether the master trust is being used for the future record of benefits, or whether it is transferring benefits that have already been accrued. I worked on a project last year where both happened and I very much see the decision-making process falling into two categories, the first one is could the trustees decide to agree to a proposal, and the second one is should they agree to the proposal, and this will vary depending on whether it's being used for future accrual or the transfer of accrued benefits.

Chris

So that's an interesting question for trustees that they'll need to think through before transferring DC benefits to a master trust, can you tell us a bit more about what you've seen about how trustees go about that decision-making process, Charlotte?

Charlotte

Certainly and just to chip in now I think this could even become more important in due course now there's new value for money requirements for schemes under 100 million pounds, so I think that's worth bearing in mind as well. So, yes as I mentioned it's depending on what the master trust is being used for, so if it is being used for future accrual benefits then consideration will need to be given as to how the original scheme can be closed to future accrual.

This is outside of the scope of what this podcast will go into detail about, but worth obviously considering methodology and also the start consultation requirements.

Chris

Yes and often, sorry I was just going to add Charlotte, often the original scheme will be close to accrual already so not always something to have to think about.

Charlotte

Yes definitely agree with that Chris. So you're turning on to the good side for the transfer of accrued benefits, this is usually okay to satisfy so I think the first step is to have a look at the scheme rules to see if there's a bulk transferable that allows the transfer members benefits without their consent and if there isn't one and it should be fairly easy to insert one, subject to any restrictions on the amendment power.

So that is one aspect of it, then you need to look at the legislation requirements and helpfully a automatic gateway for transfers to authorized master trusts was introduced a few years ago. So this allows the transfer to go ahead without needing an actuary certificate which helps to simplify the process. Worth pointing out that there's also notice requirements so members have to be given a month's notice of the transfer without their consent and this needs to be factored into any project plan.

It's also worth saying that careful consideration needs to be given to the type of benefits that are going across because it needs to come within the definition of relevant money purchase benefits, so for example if you have abc's with profits then this may not come within that definition and an actuary certificate may be required, and this may also cause a few issues if those type of benefits were to go into the master trust in terms of the benefits that could be provided on the transfer.

Chris

Are they common with profits, abc's, would you say, Charlotte, or are they something you see from time to time, have they propped up on your transactions?

Charlotte

Well it's not something that I see on all my transfers I've done, but certainly cropped up on some that I have done in the past, so yes definitely something to consider.

Helen

Thanks Charlotte, and turning to the 'should' now, what are some things that trustees should think about when deciding to move their DC sections into a master trust?

Charlotte

So this does need to be given some thought because although as I mentioned there is an automatic gateway to authorized master trust, this doesn't necessarily mean that trustees should come to a foregone conclusion that this is the best thing to do.

So trustees will need to consider their advisory duties, particularly acting and thinking about acting in the best interest of the beneficiaries and also an important aspect of this is taking advice.

So this will include investments and legal advice and really having a good audit trail of the factor that they've considered, the advice they've taken, before coming to the conclusion that they've decided to reach and it may be that they do reach the conclusion that it's best to go into the master trust, but this shouldn't be an automatic decision, and it is possible that alternatives could also be considered.

Chris

Yeah absolutely so there's probably a few different considerations for trustees, Charlotte can you let us know your top tips?

Charlotte

Yes so I think one of my top tips is in relation to tax protections and the use of taking your pension commencement lumps and when I talk about tax protections I'm talking about individuals with protected pension agents or protected cash and this is an interesting one because if it's a hybrid scheme the original scheme and then the transfer of the DC section then the benefit of that protection could be lost because there's a separation of benefits, although just to note that it seems like potentially under the new type of protected pension age, the protection wouldn't be lost, so clearly it may be the members do want to continue to take their pension before normal minimum pension age, or benefit from their protected cash.

So a mechanism that I've seen work on quite a few occasions is to allow the individual to transfer back their pot of retirement and to do this you'll need to make sure the rules are clear allowing this to happen and also think about the form the benefits will take and where the amounts will be held and also to see whether, when the transfer does come back, whether the DC governance will have to be complied with. Yes so similar principles will also apply for individuals who can use their DC pot towards their PCLS, and thought also needs to be given to those who have lifetime allowance protections, for example whether this would fall within a permitted transfer.

Chris

So the headline principle of letting members transfer their DC pots back in to fund their pension commencement lump sum is straightforward in headline terms, but there's a number of bits and pieces to think about as you put that mechanism into action, would you say that sounds like what I'm hearing?

Charlotte

Yes definitely and I worked on a very interesting case last year where this was being considered and, particularly from the DC governance requirements, trying to ensure that the benefit of going to the master trust and not having to do the DC requirements is carried through, so just trying to get a balance between allowing members the flexibility to what they want to do with their benefits but also sure that the correct channels have gone through.

Chris

Yes absolutely, and what would your other tips be, would you say?

Charlotte

So my second one would be in terms of monitoring the master trust so it's important that obviously this continues to be fit for purpose and this very much should be an employer's role rather than the trustees role, and so one of the key elements to this is checking that the rules of the master trust have sufficient termination provisions to allow smooth exit, and although the trustees wouldn't necessarily be involved with the decision-making process it may be that they need to help facilitate the transfer back to the original scheme, so that is one aspect. Another aspect is in terms of trustee protection and this is important because if a claim were ever to be made against the trustees and you're essentially left with a shell of a DC section, or a shell of a scheme, then there wouldn't necessarily be the assets to protect the trustees, so it's worth thinking about if there's not a current indemnity from the sponsoring employer whether one should be asked for and also whether it's appropriate to take out separate insurance. It's worth noting that if the original scheme was not a segregated scheme then it may also be possible to benefit from the assets of that section as well so that is something to consider as well.

Chris

Sorry Charlotte, I was going to say the co-mingle of assets between different sections is an interesting thing in its own right isn't it, probably outside the scope of this podcast, but co-mingling of assets between sections has its own host of legal issues to think through before trustees necessarily allow that. Sorry you were just coming on to your last top tip there.

Charlotte

Yes and this is on investment mapping and cost. So noting that there is no requirement to take investment advice, where existing accounts are being mapped to different funds in the master trust considerations should be given to how this is done and appropriate advice taken particularly with regards to any potential losers and any steps taken to mitigate any investment risks, such as pre-funding.

Chris

Yes absolutely in investment advice absolutely, or thinking about investment absolutely key to the whole process. Charlotte thank you for coming on the podcast and sharing your expertise with us and to our listeners if you've enjoyed listening and think a DC transfer to a master trust might be something of interest then we'd be delighted to discuss options further with you.

Helen

Thank you for listening to the Burges Salmon Pensions Pod. If you'd like to know more about our Pensions team and how our experts can work with you, you can contact myself, Chris or any of our team via our website. All of our episodes are available on Apple, Spotify or wherever you listen to your podcasts. Don't forget to subscribe and thanks for listening.

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