The Pensions Regulator (tPR) obliges trustees to manage closed Defined Contribution (DC) arrangements to the same high standard as if they were open to future accrual.  

TPR requires trustees of closed DC schemes to continue to conduct investment strategy reviews and performance monitoring exercises, paying particularly attention to the fund range offered and default fund utilised. They must also regularly review the administration and communications afforded to ensure they remain appropriate, as well as ensuring they continue to meet tPR’s ‘Trustee Knowledge and Understanding’ requirements.  

Sponsoring employers are often frustrated about the cost of looking after such arrangements, many of the members of which no longer work for the organisation. Employers commonly address these frustrations by ceasing to meet scheme expenses.  

Whilst most trustees would prefer to continue to look after members’ benefits within the scheme, they recognise that the lack of employer support would ultimately result in scheme expenses being met from a decreasing number of members’ funds. Trustees therefore usually seek to discharge the responsibility for members’ benefits, with the objective of effecting scheme wind-up.  

To do so, trustees try to encourage members to transfer benefits out of the scheme. However, contacting members, arranging financial advice and offering incentives can be both time consuming and expensive. Success relies on members voluntarily moving their benefits – most do not.  

The use of contract based buy-out policies (sometimes known as S32 policies) can achieve 100% success as member consent is not required. However, many trustees feel uncomfortable with moving benefits into such policies as:

• death benefits become subject to inheritance tax, unless individual members establish their own trusts;
• with-profit funds may be reduced by the application of aMarket Value Adjustment (MVA);
• without trustee support, members need to meet the additional expense of IFA fees, or else may receive a lower retirement income due to inappropriate investment orretirement decisions.  

As well as detrimentally impacting members’ benefits, S32 policies can be costly and time-consuming to establish, requiring detailed paperwork and communications to be undertaken, whilst scheme expenses continue to be incurred.