Trust-based DC schemes will become the new final salary scheme by 2020, law firm Irwin Mitchell has predicted.

According to pensions partner Nigel Bolton, a significant difference between trust-based DC schemes and contract-based DC schemes is that trust-based schemes are more heavily regulated as to how they are administered, and the employer is a party to that trust, while contract-based schemes currently face only limited regulation and there is no contractual relationship between the employer and provider.

As a result of auto-enrolment, “many employers, such as SMEs, will want to choose schemes that place minimum risk and low costs on the employer”, he explained.

“Whereas the scheme expenses on contract-based schemes are met by the annual management charges deducted from members’ funds, the cost of administering many trust-based schemes is met by the employer. By 2020 it is likely that trust-based schemes will have become the new final salary scheme,” Bolton added.

The PPF in May announced that 14 per cent of final salary pension funds remained open to new members, and 30 per cent had been closed to future accrual by existing members.

According to Bolton, the main reason for this fall is the high cost and volatility of running these schemes, and with the impact of the changes in PPF levy calculation, this trend is set to continue, so that “by 2020 it is expected that active private sector final salary pensions will be rare”.

There are currently around 39,000 trust-based DC schemes, Bolton said, with over 2.7 million members. One type of contract-based DC scheme, a Group Personal Pension (GPP) has increased in number from 297,000 in 2009 to 755,000 in 2013, he added.

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