Unbundled DC schemes a 'ticking time bomb' in Covid crisis - Salvus

Unbundled defined contribution (DC) schemes could be a “ticking time bomb for both members and firms” due to a lack of rules and regulations, Salvus Master Trust has warned.

The firm emphasised that these schemes, which were traditionally set up by employers to provide a framework for regular pension savings with a board of trustees providing oversight, can “come at a cost” to members.

It warned that the biggest risk posed by these types of arrangements, which in 2019 covered over 1.1 million members, is a lack of mandatory reserves to ensure member pots are not eroded in the event of a wind-up.

As many employers face increasing financial pressures due to the ongoing pandemic and the resulting lockdown, Salvus Master Trust head of sales, Bill Finch, has warned that this threat could be further exposed.

Finch explained that winding up a pension scheme requires “significant spend” to cover the cost of essential fees, such as legal advice, member communications, and The Pensions Regulator levy.

However, he highlighted that, unlike the master trust community, which is obliged to hold reserves, contract-based schemes that protect members by design, or defined benefit schemes which have the Pension Protection Fund to rely on, unbundled DC schemes and their members have "no lifeboat to rely on".

He explained: “The lack of reserves available within unbundled DC schemes is leaving both the schemes and their members in a highly vulnerable position.

“Without sufficient money set aside to cover these costs the only assets left in this scenario would be member pots or maybe a non-allocated account to pay the wind-up fees.

“It is important that people know how much they may need to accommodate these elements as, for some, this figure could be many hundreds of thousands of pounds - a significant amount for most employers and trustees.”

He added: “We have seen a number of high-profile company failures in the last few years especially in the retail sector, and we believe that unbundled DC schemes are particularly at risk should a sponsor fail, as many won’t have considered where the money to cover the cost of winding-up the scheme will come from."

Finch urged trustees to consider the financial position of their sponsor, and the potential risk posed to members, especially considering the current circumstances and challenges facing many firms.

He added that, whilst introducing legislation which would see unbundled schemes adopt some or all of the Pensions Scheme Act 2017 regime would be a “sensible approach”, employers should also consider pursuing “alternative routes”, such as contract-based schemes, in the meantime.

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