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Saturday, 17 December 2011

Blast from the past - August 2007 Professional Pensions

Other side to ‘pro-contract propaganda’

In response to your front page article "Trustee ‘paternalism myth’ needs debunking", can I put the other side of the argument to redress this pro-contract propaganda?

Many employers with trust-based defined contribution schemes are attracted by the considerable advantages that trust gives them, for example:

•Ability to hire and fire suppliers/advisers and employ “best of breed” for each process.

•The ability to offer investment choices pitched right for their members, and this will often be a narrow choice of low-cost options by design.

•Greater transparency.

•Bespoke design and integration with other benefits.

•Ownership of communication process and greater affinity with employer.

•Fiduciary duty of trusteeship and impartial approach with no profit motive.

•Protection of members against high charges, especially after they leave employment where employers with contract schemes will cease to have influence.

•Short-term member contribution refunds available (up to three months automatically, but up to two years if no transfer value taken).
This stops numerous small benefits from accumulating (which are generally disproportionately costly to administer) and enables the employer to allocate his contributions to pay for other pension benefits, or to defray administration costs, etc.)

Clearly there is a place for contract, but there appears to be a heavy push going on to sell contract-based arrangements to larger employers, which appears to be based on taking advantage of the alleged “hassle factor” of trust schemes and the neat solution contract appears to deliver.

Some of the advantages of trust are, I fear, being quietly forgotten about, which suits those advisers doing very nicely out of selling contract arrangements, and potentially earning residual commissions for many years to come!

Nice work if you can get it!

Stephen Tiley

Footnote: December 2011 - Steve Webb announces consultation on banning short term refunds for DC schemes.

Note: IFAs often prefer contract due to their own self-interest.

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