Trust or contract?

In an increasingly litigious environment many employers are mitigating risk by making the switch from traditional trust-based occupational pension scheme to contract-based alternatives. Key reasons for this change are:

Recent legislative changes

Pension simplification became effective on April 6th 2006. It is the greatest overhaul our pension system has seen to date, bringing into force the changes laid out in the Pension and Finance Acts 2004. Effectively, all pension regimes are now subject to the same legislation. Therefore many employers will no longer want to carry the liabilities associated with a trust-based scheme.

The responsibilities of trustees are continuing to increase

With pension simplification and the new pension regulator both in force, it seems the Government is raising the bar on the levels of knowledge and diligence that a trustee must apply – including deliberations over the introduction of trustee exams. Trustee meetings and training could lead to more staff downtime and if these schemes’ benefits are no longer so clear, the risk and cost associated with them no longer seems as worthwhile.

Improved services on contract-based schemes

When the Government introduced stakeholder legislation in 2001, the providers of contract-based pensions were forced to improve the efficiency of the services they offered. This is because the charge on these pensions was capped at one precent per annum of the fund invested. Providers would therefore receive less revenue from these schemes than they had experienced with older group personal pensions. This has forced them to invest heavily in technology in order to make a profit from the new narrow margins. The result for the end user is a far more efficient product with slick administration and often with many fund choices available.

• Many advantages of trust-based schemes have been eliminated through pension simplification.
• Trust-based schemes have increasing responsibilities and costs.
• Contract-based schemes have become more efficient.