Finding out what protections are in place for DC assets is not straightforward, finds Helen Morrissey
The DC code says that trustees need to understand the protections in place for defined contribution (DC) assets. However, this may not be as straightforward as it first appears. While many believe DC assets will be covered by the Financial Services Compensation Scheme (FSCS) the reality is much more complicated.
How a fund is structured could have a major impact on what protections would kick in if things go wrong. However, as yet it is not an issue widely discussed by trustee boards.
"This is not often a topic that makes it onto the agenda of trustee board meetings but the reality is that trustees must consider the issue and ask questions of their providers and advisers," says Association of Member Nominated Trustees (AMNT) board member Barry Parr. "Most trustees will not have an understanding of the differences between fund structures and the implications of having them on platforms that may or may not be supplied by the same company. There is also a concern that trustees may be misled into pursuing low cost at the expense of security, so they need to be asking questions."
Another issue that may hamper the discussion of DC asset security is a sense of complacency that as yet there have been no major issues in this space.
"There is an assumption that all will be ok," says Allen and Overy partner Maria Stimpson. "For instance there hasn't been a major failing of a custodian in the UK but that is not to say trustees should not be aware of the risk."
Allen and Overy PSL counsel Helen Powell agrees there is a sense of complacency around the levels of protection: "I think there is a false sense of security that goes alongside having agencies like the Pension Protection Fund and the FSCS in place," she says. "People automatically assume the same protections apply to DC as DB but the fact is you have to meet very specific criteria to be covered by the FSCS."
Hymans Robertson partner Rona Train, along with AMNT's Parr is part of the Security of DC Assets Working Party set up to look into the security of DC assets. She acknowledges the challenge of understanding how assets are protected.
"The working party has been up and running for two and a half years and we are still to get definitive answers on security of DC assets so it is certainly not straightforward," she says. "However, we need to help trustees to understand the structures of the funds they are invested in and how any protections might work. For instance if a platform were to collapse, how would that be dealt with?"
The working group put together a guide on the issue last year that aims to help trustees understand these issues. It is hosted on the AMNT's website.
She added: "It is all very complex but we would urge trustees to try and establish how their funds are structured and then work with their consultants and lawyers to work out the protections in place. Some platforms do issue their own guides on this issue but that does not go far enough. Trustees need to get to grips with how the funds are structured and what the protection implications might be."
Getting hold of information
Allen and Overy's Powell says the firm has been working closely with its clients to try to understand these issues but that it can be difficult to get hold of the necessary information.
"We have had some difficulty getting responses from providers when we have asked for this information in the past but it is getting better," she says. "If you think about it then a provider offering these investments would have access to this information and we wonder why individual trustee boards should have to do all the legwork in finding this out. It should be part of the fund manager's proposition to put this information out there so we feel the situation should be flipped on its head."
Stimpson agrees that making such information readily available will enable a frank discussion to happen between investment consultants and trustee boards when new investments are being put forward for instance.
Schroders DC product manager David Heathcock says that while it would prove very difficult to provide this information upfront as standard, asset managers should have no difficulty in responding to trustee questions and providing information as needed.
"The difficulty comes in that there is no definitive yes and no answer that you can provide," he says. "While it is easier to provide answers when the assets are being accessed directly, it becomes more complicated when they are being accessed via a platform and there are many different factors that need to be looked at before an answer can be given. However, just because it is complex doesn't mean the answers aren't there and by engaging with their fund managers, consultants and legal advisers, trustees can get the answers they need."
So while establishing what protections are in place for DC assets may seem like an onerous task, it is something trustees must get to grips with. Engaging with fund managers and scheme advisers will be vital in ensuring trustees ask the right questions and get a clearer picture of where they stand.
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