UK employers may avoid certifying 'borderline' DC
UK - Employers operating defined contribution (DC) schemes on the "borderline" of meeting the quality requirements for the 2012 reforms may be less likely to use self-certification because of cost issues, Hymans Robertson has suggested.
At a seminar on auto-enrolment and the impact of new pension regulations, Lee Hollingworth, head of DC consulting, said if employers choose to self-certify that their existing scheme meets the qualifying requirements - minimum of 8% contributions with 3% from employer - they will be liable for any shortfall at the end of the re-certification period.
The draft regulations released last week proposed that schemes will fail the qualifying test if an individual employee has a shortfall of more than 5% of minimum contributions, or a single employee has a shortfall twice in two years, or if there is any shortfall for more than 10% of jobholders. (See earlier IPE article: UK: DB schemes given 3-yr auto-enrolment deferment)
However, Hollingworth pointed out that certification is voluntary, so if an employer instead opted for a process of full annual reconciliation for all jobholders, the burden of making up the shortfall would be placed on the employees. (See earlier IPE article: Gov't targets annual reconciliation solution)
He told attendees that certification is likely to appeal more to employers offering good quality schemes that would easily meet the minimum contribution requirement. On the other hand, he suggested, "the attraction of certification is less if you have a high number of variable workers, or if the DC scheme is on the border line".
He warned "there comes a point when ensuring DC schemes meet the requirements of certification becomes reconciliation by another name", and argued in this case the employer would have to bear the costs.
Helen Dean, policy and product development director at the Personal Accounts Delivery Authority (PADA), also said the "bare bones" of the trustee corporation for personal accounts - the chairman, deputy and three or four other trustees - should be in place next year.
PADA has already started advertising for the role of trustee chairman, as the trustee corporation will be responsible for the investment strategy and operation of the personal accounts system. It will also be established as a non-departmental public body accountable to Parliament, which Dean pointed out is a "unique role".
PADA will give the trustees recommendations on the investment strategy, and Dean revealed the organisation received over 60 responses to its recent investment consultation - which closed on 7 August - with the main theme of the responses underlining the need for "tightly focusing on the attitudes and characteristics of the members".
She also admitted the investment strategy will need to take into account the requirement for a low charge structure. But she reiterated that although it is likely to be "0.5% annual management charge or equivalent ballpark" the actual figure and the structure - whether an AMC or combined charge - has not been finalised.
She told attendees: "We need to understand the costs of the scheme, and that will be developed further in the procurement process for a scheme administrator. The issue of the actual charging structure is also an open question. It is an issue the DWP is working through as they look at what the funding arrangements should be." (See earlier IPE article: ATP heads up personal accounts admin shortlist)
Meanwhile, Andrew Elliott, senior investment consultant at Hymans Robertson, revealed that while the personal accounts default fund is likely to be seen as an "industry benchmark" the objectives of other occupational schemes will be different and require more flexibility.
Instead of traditional lifestyling, which he suggested is not flexible enough, schemes should offer more than one option, "maybe three lifestyle solutions one of which should be a default" - such as aggressive, balanced and cautious. Within the 'aggressive' option instead of relying on 100% equities, Elliott suggested diversified growth funds could be an attractive option as they aim to have less volatile returns.
He said: "Schemes and providers should be thinking about the future and what they need to be building further down the line. We need to change the way we think to get members to think about objectives and risk exposure rather than just equities or bonds."
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