Prior to entering the PPF, trustees of Defined Benefit (DB) schemes should move all DC benefits out of the scheme.  

Until appropriately discharged, trustees retain a duty of care in the management of their DC benefits. The principle applies equally to DC sections of hybrid schemes, DC Additional Voluntary Contribution (AVC) schemes and protected rights benefits.  

The Pension’s Regulator (tPR) obliges all trustees of DC benefits to regularly undertake investment strategy reviews and performance monitoring exercises, paying particular attention to the fund range offered and default fund utilised. Trustees must also frequently review the administration and communications afforded to ensure they remain appropriate.  

Upon the insolvency of the sponsoring employer, the PPF issues a notice to schemes suspending any wind-up that may have commenced. This restricts the options that are available to discharge DC benefits (unless the DC section can be deemed 'segregated.')  

Trustees could encourage members to voluntarily transfer benefits out of the scheme, but attempting to contact members can be time consuming and expensive. Success relies on all members moving their benefits – most do not.  

Hypothetically, contract based buy-out policies (sometimes known as S32 policies) can achieve 100% take-up as member consent is not required. However, as the scheme is not in wind-up, such policies can only be used where members have been deferred for at least twelve months and have less than five years pensionable service. Additionally, protected rights cannot be addressed without member consent.  

Even where permissible, many trustees feel uncomfortable with moving benefits into such policies 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 receive 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 communication to be undertaken. All the while, scheme expenses continue to be incurred, and the transition to the PPF is further delayed.