Written by Simon Pickerill, Broadstone Corporate Benefits

If you are an employer with a trust-based pension scheme you are likely to have a new regulatory requirement looming on the horizon. And one which could have unexpected time and cost consequences over the next few years.

A new Value for Members (VFM) test is being planned by the Government for enforcement from October 2021. This requires trustees of pension schemes with less than £100M of assets test their schemes against the largest UK schemes; including one which is ready and able to take in the smaller scheme membership if necessary. When the smaller scheme is not delivering the same overall value package for members as the larger comparator schemes, these smaller scheme trustees will have to confirm whether they will be transferring members into larger schemes and winding up, or what they are going to do to improve value for members under the existing scheme. The Government is clear that larger pension schemes are generally using economies of scale to provide lower cost, higher returning, better governed pension schemes than smaller ones can. Driving consolidation of pension schemes is their stated aim and further legislation is promised if it doesn’t happen fast enough.

Regulatory costs and responsibilities

This new VFM test is an annual review and there are minimum requirements on how the test is done. Responsibility for formulating the test, choosing large scheme comparators and reporting the results will fall on trustees. So, the trustees will need ongoing additional resource for as long as the scheme and these requirements exist.

They will also need employer guidance on how the scheme’s long term future is seen. It may be that your scheme meets the large scheme VFM challenge but, if not, is this a scheme you want to support and, if needs be, invest in further to upgrade? Or do you prefer to close and wind up the scheme? Either course of action carries its own costs to your organisation and consequences for the people whose financial futures you have helped support up to now.

This is clearly a significant duty for trustees. As is often the case for schemes of this size, if you are both employer and trustee of a scheme which has, until now, apparently ticked over with almost all responsibilities managed by your pension provider, you may need to rethink how much you rely on others.

What are your instincts?

If as an employer you are highly engaged in and committed to supporting your current pension scheme for the good of employees past, present and future you may feel motivated to protect and, if needs be, improve your current scheme.  On the other hand, you might be an employer with a legacy scheme which has few if any members still working for you and are struggling to find the appetite and the time to continue supporting trustee duties so now have a long term plan to wind it up. Of course, you may be somewhere in the middle. Either way, the new requirements are effectively forcing you to make choices and make decisions about which route to take over the next couple of years.

For these sub £100M pension trust schemes, 2022 may be the year for compliance but 2021 is certainly the year for making forecasts and setting your course.

By Lisa Baker, Senior Editor

Senior Editor Lisa Baker is the owner of Need to See it Publishing Group, providing contract news for business and news sites across the UK. Lisa is an experienced HR writer and commentator, editing HR publications for more than 5 years.