Non consented transfers: Bulk Transfer Certification
Paul McBride, head of governance for Capita Employee Benefits’ Atlas Master Trust, comments on non-consented transfers: Bulk Transfer Certification.
As we now know, the legislative encumbrance that can stifle DC rationalisation went unaddressed in the Pensions Bill. DC sponsors, Trustees and practitioners – of Mastertrusts and Single Employer Trusts alike - are left ruing the legislative draftsmen who failed to understand that DB and DC may be from the same genus, but they are not the same species. It may not only be them who are left to rue the long hoof into the high grass. For better or for worse, DC rationalisation is at the heart of regulatory policy today. Ignoring the elephant in the room won’t help deliver it.
So what can be done to make DC rationalisation simpler?
Let’s first euthanize the canard that Trustees can get member consent before the transfer. Of course they can’t. They can and will get it from some members. But – with the odd exception proving the rule - they will never get consent from all. Consented bulk transfer scuppered.
Defining what constitutes ‘….transfer credits to be acquired for each member ... are, broadly, no less favourable than the rights to be transferred’ would seem to be straightforward to many. Most people (and I suspect just about every pension scheme member), would interpret a DC transfer credit to be the value of their entitlement at the transfer date. Again, most of us would consider an identical value in the new scheme to be no less favourable. But in a recent memorandum to its members, the IFoA took a wider view, urging members to consider, among other things:
- Reductions in Yield of the old and proposed schemes
- Risk and return characteristics of different investment options
- Scheme design and member options
Such a degree of professional caution is perhaps to be expected given the lack of legislative clarity, and the actuary’s duty of care to Trustee clients.
Few would disagree that a level of actuarial analysis of this nature is justifiable in situations where there are third party guarantees, or complex financial instruments. But it is apparent to no-one that I have spoken to why it should be necessary in a ‘pure’ DC environment. I am left questioning why (in the case of 2 and 3) this should be considered the domain of an actuary rather than the domain of the Trustees themselves (especially Professional Trustees) in conjunction, where necessary, with their other advisers. Since 2015, and without widespread input from the actuarial profession, both metrics have fallen squarely into DC Trustees’ legal obligations to understand, measure and compare Value for Members delivered by their own scheme, in actual and relative terms. Making such judgements about two schemes should not be beyond their current capabilities.
Superficially, comparing Reduction in Yield between the current and proposed arrangements seems like a legitimate metric for actuarial consideration. But that disregards the reality of most of these exercises. The sponsor is almost certain to have decided not to continue to pay third party administration fees and is set on the transition to a bundled model, for all or part of the membership. The notion that the sponsor can and will cancel wind-up and continue to pay fees for evermore is simply fanciful. Members will ultimately pay a bundled AMC, whether that’s through the expedient of transfers to the proposed new scheme or through the inexpedient (from a member perspective) of a transfer to a s32 contract. The argument for precision comparison is moot where investment costs, in particular, can change at any time in either scheme at a Trustees’ or members’ behest – or with future legislative requirements. But to the extent than an RIY comparison needs to be made at all, in circumstances such as this it should be made on a bundled-to-bundled basis.
Can the current certification impasse be overcome? Possibly quite easily.
Just as with the other professional advice they commission, the transferring Trustees can and should set the scope of work. It should not have to fall to the actuary - or their professional body - to decide how to fill the vacuum created by legislation. Trustees who understand scheme design and investment can form their own opinion on the merits of each scheme and should be able to confidently exclude actuarial opinion from the scope of work. Likewise, if the Trustees are satisfied that the most appropriate RIY comparison is bundled-to-bundled, then that should be what the actuary should compare when so directed. The actuary’s legal disclaimers can negate any professional risks they perceive, and the Trustee will have a certificate which complies with the law and upon which they can act.
As things stand, I suspect that few Trustees will have the confidence to act in this way. But I also suspect that with the right level of regulatory direction, support and guidance, many more would become sufficiently confident to do so. Overcoming today’s certification problem may require little more than a common sense tweak or two to the Trustee Toolkit from a pragmatic regulator.