AVCs were originally a welcome addition to pension schemes. They enabled members, and potentially employers, to boost retirement funds. Many also came with a range of guarantees, such as minimum annuity rates and growth rates.
Given the changes to pension legislation over the years, such as pension simplification and the more recent freedoms, AVCs can seem as though they’ve been left behind. With new regulation, trustees need to plan for the future of their AVC funds.
The new pension legislation introduced in 2015 brought more freedom to employees when choosing how to use their pension funds.
We think these options are great news and welcome the change. However, other pension legislation introduced over the years hasn’t always been so kind, particularly to the trustees and employers who are working hard to get the best outcomes for their employees.
One of the big challenges many schemes face today is dealing with additional voluntary contributions (AVCs). Whilst schemes were originally required to offer AVCs, the necessity was removed in 2006. And many trustees
stopped offering their AVC option.
Spring forward to 2013 and The Pensions Regulator’s Code of Practice 13 for Defined Contribution (DC) schemes began to move AVCs back up the agenda.
The Code is being updated and, combined with other legislation over the years, could leave many schemes with the headache of managing an onerous legacy of AVCs. It’s a legacy that requires clear member communications, regular reviews, benchmarking investment performance and ensuring costs are appropriate. Members may also begin asking if they are getting value for money.
And it’s time and money that scheme sponsors might prefer the trustees to focus on, for example, other areas of the scheme, such as its deficit.
As trustees, are you ready for the changes?
Do your members understand what the pension changes mean?
Is the scheme ready to deal with new pension freedoms?
Have investments been reviewed to ensure they are appropriate?
Are your scheme's policies and rulings up to date?
The solution needs to be simple for all, enabling a clear, effective way to manage AVCs.
To support the trustees and meet the requirements of Code of Practice 13, it needs to give value for money.
Managing the AVC element of a scheme takes valuable time. So any opportunity to enable trustees to focus on other challenges offered by their schemes can be crucial.
Pensions are about the future, so the solution must protect the needs of members both today and tomorrow.
Opportunities and risks need to be managed with expertise, skill and the highest standards of governance.
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