Unbundled DC schemes 'a ticking time bomb' after Covid-19

Salvus head of sales Bill Finch said the biggest risk posed by an unbundled arrangement is the lack of mandatory reserves to ensure pots are not eroded in the event of a windup.

Unbundled DC schemes - traditionally set up by employers to provide a framework for regular savings with a trustee board providing oversight and governance - covered 1.1 million members in 2019.

"The lack of reserves available is leaving both the schemes and their members in a highly vulnerable position," Finch said.

"Winding up a pension scheme requires significant spend to cover the cost of essential fees like legal advice, member communications and administrations, and The Pension Regulator levy."

Unlike the master trusts, which are required to hold reserves, or defined benefit schemes which are protected by the Pension Protection Fund, unbundled DC schemes have no lifeboat arrangement.

Finch said the "number of high-profile company failures in the last few years"- most notably across the retail sector - means many schemes do not have money to cover winding-up costs.

He added: "Without sufficient money set aside, the only assets left in this scenario would be member pots or maybe a non-allocated account. It is important that people know how much they may need to accommodate these elements as, for some, this figure could be many hundred of thousands of pounds  - a significant amount for most employers and trustees".

Finch stated a change to the Pensions Schemes Act regime which would require DC schemes to adopt "some or all" of it would be the most suitable option.

"In the meantime, it's worth employers considering alternative routes," he said. "Trustees should now consider the financial position of their sponsor and the potential risk posed to members, especially now with so many firms facing challenges in the current environment."

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• Topics
• Defined Contribution
• Savlus
• DC Schemes
• Coronavirus