The cost of administering trust based Defined Contribution (DC) arrangements is increasing each year, with the extra cost often being incurred for former employees.

Staff turnover is principally responsible, though salary sacrifice arrangements also increase the number of deferred members as they prevent the payment of refunds of contributions for short service leavers. The introduction of auto-enrolment from 2012 will further compound this issue. There are now many schemes where deferred members outnumber active members.

Once all administration, management, levy, audit and associated communication costs are considered, the cost to an employer of each deferred member can vary from £50 to well over £100 per year. For example, a 20 year old former employee may cost the employer over £4,500 before he retires! Steps are being taken to address these costs, but with limited success. 

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

Contract based buy-out policies (sometimes known as S32 policies) can achieve 100% take-up as member consent is not required. 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).

Consequently, many trustees feel uncomfortable with moving benefits into such policies. Further, without the trustees’ support, members need to meet the additional expense of IFA fees, or else may receive a lower retirement income due to inappropriate investment or retirement decisions.