DC AVC sections of DB schemes are subject to increasing compliance and governance challenges. 

The Pensions Regulator (tPR) obliges trustees to manage DC AVCs to the same high standard as all other DC trust based schemes, whether they are open to future accrual or not. Trustees are required to undertake DC training, conduct investment strategy reviews and initiate performance monitoring services, paying particularly attention to the fund range offered and default fund utilised. Trustees must also regularly review the administration and communications afforded to ensure they remain appropriate. 

Trustees could encourage members to transfer benefits out of the scheme, however, contacting members, arranging financial advice and offering incentives can be time consuming and expensive. Success relies on all members voluntarily moving their benefits – many do not. 

Contract based buy-out policies (sometimes known as S32 policies) could achieve 100% take-up. However, they can be costly and time-consuming to establish, requiring detailed paperwork and communications to be undertaken. They may also detrimentally impact members’ benefits as:

• Pre A-day tax free cash calculation bases are lost;
• Death benefits become subject to inheritance tax, unless individual members establish their own trusts;
• With-Profit funds may be reduced by the application of a Market Value Adjustment (MVA);
• Without trustee support, members need to meet the additional expense of IFA fees, or else may recieve a lower retirement income due to inappropriate investment or retirement decisions.

As well as detrimentally impacting members' benefits, S32 policies can be costly and time-consuming to establish, requiring detailed paperwork and communciations to be undertaken. All the while, scheme expenses continue to be incurred.

Trustees also need to consider how future AVC contributions will be dealt with.