DC Excellence: Exploring DC to DC transfers

Richard Lee: Morning, I hope everybody is well out there and welcome to the DCX learnt section on Exploring DC to DC transfers hosted by Gowling WLG and Isio. So, I hope that you are all fine. Normally we would say to you seminars, I am the chair and I'm just going to run through some housekeeping tips.

Number one, if you hear an alarm it's probably your own smoke alarm or maybe your CO₂ alarm or maybe it's that you're being burgled but on webinars that's over to you and secondly toilets which we'd normally say down the corridor to the left but assume you will know where your own toilets are.

So, what I would encourage you to do though in this session is use the Q&A button so that we can try and deal with all the questions that you have on what is a very hot topic at the moment.

So, just wanted to introduce our speakers and the running order so first we have Emma Skedgel, senior manager from Isio. Emma particularly likes to strip out the pensions jargon when she is advising and make sure that everything is clear and in plain English and I can attest to that and I asked each of the speakers to let me know about an interesting fact. Emma's interesting fact about herself apparently is that she is that she is a Wolverhampton Wonders supporter, tragic but true. Secondly, that she is also on the board of a local animal welfare charity. So, thanks Emma.

Suzannah: who is one of the senior lawyers in the Gowling team and advises a lot of the time on DC aspects and transfers and I was interested actually. I've known Suzannah for a long time but Suzannah has let me know that her, I think it was her first job or certainly a job before she was a pensions lawyer was a ballet teacher, which is fantastic. I can't believe you gave that up to be a pensions lawyer Suzannah, but there you go.

Next we have Emma again, can't get enough, can she Emma? But with Helen Slave who is a DC investment consultant from Isio and Helen has let me know that she is a very big fan of netball, can't wait to get back on the court, elbowing people in the ribs all that sort of stuff I guess it is, and in common probably with some of you out there and some of the other speakers having tried home schooling, I think Helen is convinced that teaching children is best left to the professionals. And finally, Jo Tibbott, a partner in the Gowling pensions team as well and lead partner on DC. And as well as having similar experiences on home schooling, Jo has lately become an avid Aston Villa supporter in line with her young son and husband, so hoping for a great result at the weekend. So we're just going to move over into the first slot with which is Emma and proof of concept, thank you Emma.

Emma Skedgel: Thank you, Richard and thank you for the awesome introduction, I think you've set us up very nicely. If you could take us to my first slide please Richard, thank you.

OK, good morning all. So, we thought it might be helpful acknowledging that there's probably varying levels of knowledge and familiarity with particularly the master trust market, just to spend a couple of minutes on the different types of DC delivery vehicles. In the top left hand corner there you can see that we can have an own trust scheme which might be bundled with a provider or unbundled. We've obviously got master trust, which we're focusing on in a large part today, and then also contract based arrangements which generally will be a group personal pensions scheme or a group stakeholder scheme. So, within the banner of DC there's kind of under the bonnet different structures in the mix. You'll see on the graphic on the left hand side, the bottom left hand side there, just a visual that takes a sample of the master trust provider market. I will preface this by saying it's not an exhaustive list, it's just a sample and it's also out of date from the minute that you talk about it because of the pace of growth in the master trust market. So, it just give you a kind of flavour as to the level of assets and the number of members that have moved to master trust. There's an obvious outlier on the right hand side there with the blue arrow, that's the L&G master trust and L&G did very well in the early days of auto enrolment in 2012 and 2013 by capturing some of the mega schemes and really springboarded on from there in terms of continuing to win new mandates. Another thing to point out, I guess, is an example with life sites which you may or may not be familiar with, so that's Willis Towers Watson master trust product. They will undoubtedly correct me that their assets and the management now are somewhere in the region of £7 billion because they have been busily onboarding a number of new schemes in recent months. So, the growth is just incredible. We only see it going in one direction and it makes for a really, really interesting market.

On the right hand side there you'll see that we have very crudely just put again a sample of the master trust providers into four different buckets. So, at the top there you'll see the more insurance company type names so household names that you'll probably be familiar with, with some boxes around some of them to show activity that's occurred in recent years. So, Aegon acquiring BlackRock DC business, Aviva acquiring Friends Life and so those are the more well-known master trusts it's probably fair to say in the marketplace.

The super trusts that we've got in the middle there. Historically, they were designed and built to meet the auto enrolment need if you like but they have since to varying degrees evolved their propositions into something perhaps more sophisticated than what they started with its fair to say.

We've then got the third party administrators, again a sample there of employee benefit consultants who'd now offer their own master trust product and what we tend to see is where the administrators are keen to be considered as the ultimate provider of the master trust then they tend to count themselves out of the provider selection adviser repeat because of the obvious conflict that present themselves.

And the fourth bucket there at the bottom may not be names that you're as familiar with but again just a sample of the autowise master trust providers that have some incredibly interesting and really varied propositions so the idea here is just to give you a flavour of one product that when we look over the bonnet can be incredibly different across a range of different elements.

So, moving on to the change project itself and whether or not it's something that it worth considering, very mindful that in our experience the whole exercise if firstly optimal when it's a true collaboration between trustee and company. There's obvious "go"/"no go" so we certainly see the most successful exercises being where you don't commit to the whole project right at the beginning, that there is obvious kind of steps and pause points to reflect on whether or not the project in its entirety makes sense.

So, the first element, generally this is led by the company, not always but generally. It's a cost benefit analysis. So, that's where we'd look at everything that, all of the costs that are associated with the current scheme. So, that might be administration fees for active and deferred members, it will be the FM assessments, maybe chaired statements, trustee meetings, admin costs, etc. etc. and then compare whether or not all of those things, costs for future improvement importantly as well because I think we all know that regulations are only going in one direction, and then we look at whether or not or over what period the cost of change will make sense, breakeven point and actually then there are some cost savings to be had. So, generally speaking the cost benefit analysis stacks up because of where schemes are coming from and the ability to be able to absorb some of those existing costs into a new arrangement but you've got an obvious "go"/"no go", if the costs don't stack up then that may well be your kind of pause point and your exit point. Assuming it's not and that it does make sense, then very early on in conjunction with legal advisers we will consider any potential barriers to change, obstacles landmines, things that might cause issues and need to be either litigated and ideally overcome. That might be things like protected tax free cash, protected early retirement ages, DB members, where they want to use their DC pot to convert cash. So, all of those things in conjunction with the legal advisers need identifying and then from the advisory perspective a kind of practical consideration around how they can be dealt with. Again that presents an obvious "go "no go" point at that stage, some barriers. It might be deemed that they can't be overcome. Again, assuming we continue to go then clearly master trust isn't the only solution and sometimes on the right hand side there you'll see the kind of slide rule where again trustee and company, we work through what does ideal look like from a governance perspective, from an international employee's perspective, from a portability of pots perspective. If we were starting with a blank sheet of paper then what would our ideal DC vehicle look like and we work through that to then get a really nice kind of audit trail and obvious decision making process as to whether master trust is right, whether contract based is right or actually whether staying the same is right which sometimes happens as well.

So, on the left hand side there you will that we've touched on the kind of proof of concept feasibility, appreciating this is high level in terms of the time that we've got today but we just thought it might be helpful to show just an indicative timeline because we often get asked how long these change projects take. Kind of, how long is a piece of string and it depends on how many schemes are involved, the complexity, but ordinarily for a reasonably straightforward project it tends to take between nine and 12 months but that's assuming you've got past the pink bars and everybody agrees that it's a good idea and the project is a go.

The two kind of chunky elements of the provider selection process are obviously selecting the provider itself and to do that well and to give both the trustees and the company comfort that they've got a really kind of solid decision making thread and that can take a bit of time, obviously in terms of building the RFP to issue to market and we'll come on to what that process looks like a bit later on. But that certainly takes a period of time to do comprehensively and then you've obviously got the consultation with members which is generally 60 days, so you've got a pretty explicit kind of timeframe to build in there. What we generally see is to enable a true consultation that a provider has chosen is principle before the consultation process begins so that actually then you can give members some details about the type of scheme, the provider itself, maybe things like the default investment strategy that would be implemented if the proposals went through. So, a period of reflection then obviously to decide again if you're going to implement but assuming that decision is made then that is generally where we see the new provider as keen as mustard to get involved as early as possible you know with project plans and calls to make sure the project runs as smoothly as it possibly can.

Once you go live, generally we see that future contributions will start going into the scheme but you might have a couple of months where the assets that are coming across stay where they are to let things settle down because one of the biggest areas of concern we find with trustees is actually that aspect transition piece and actually that it's done well and that members end up where they should be in the right way with the right amount of cash in simple terms.

Once that's completed, again, whilst all the master trusts have master trust trustees that have ultimate responsibility for the master trust we generally see employers introducing an element of oversight to ensure that they keep the provider honest about all of the promises that they made and all of the things that they said they were going to do when they were in the running and just keeping a close eye on them delivering on that and continuing to develop their roadmap, continuing to develop their default investment strategy, things particularly like ESG at the moment, to make sure that they don't kind of rest on their laurels.

At this point I'm just going to hand over to Suzannah, who I think is going to flesh out a bit more around the barrier to change and have a think about actually whether or not you know these things are possible to do in practice, Suzannah.

Suzannah White: And hello everybody. So, yeah I'm going to look up whether it is possible to transfer and a few elements to that. So, next slide Richard.

Richard: Oh yes.

Suzannah: Thank you very much.

Richard: No, that's a pleasure, I'm very good at this.

Suzannah: Perfect.

Right, there are three elements to what I'm going to look at as set out on the slide there. So, I'm going to start with the legislative requirements. So, what does the law say you've got to do? I'm assuming in this part of the talk that it's going to be master trusts that's the receiving vehicle or another type of occupational DC scheme. It's the preferred route for future DC benefits, it's contract based and the requirements are quite different. I'm also going to assume that it's not the intention to seek consent from members as seeking consent from your entire membership is usually impractical although there might be some elements where you might need to seek consent from some people.

So, to make a bulk transfer of DC members, deferred members, without their consent the transferring scheme trustees need to comply with regulation 12 of the 1991 Preservation Regs. That process for bulk transfers of members without consent is only available for deferred members. There's no equivalent process for active members, so if a scheme still has actives, to make things more straightforward we'd advise closing the scheme to accrual prior to making the transfer if that's a possibility.

Right, so what does regulation 12 say? It says that to transfer to an occupational DC scheme without member consent you can do that if the transfer is to a master trust which is authorised under the Pension Schemes Act 2017. That's quite straightforward. Or, if you're not choosing an authorised master trust for some reason then you can do it if the trustee of the plan has obtained and considered the written advice of an appropriate adviser whom they have determined to be independent from the proposed proceeding scheme and either of those routes you follow you also need to make sure that the trustee provides members with information about a post transfer without consent at least one month before the proposed transfer dates, and Jo is going to be talking a bit more about communications with the members later.

So, most transfers these days are likely to be to authorised master trusts. It's unlikely that many trustees are going to want to transfer to an unauthorised master trust in any event. Any available call of unauthorised master trust is rapidly shrinking, providers are exiting the market or they are obtaining authorisation, so. But even if the master trust is authorised and that's the route the trustees are going they're still probably going to want that advice piece because they're going to need to consider their fiduciary duties in relation to the power to carry out a transfer without consent and I'll talk a bit more about that in a minute.

So, that's the main piece of legislation but there are a few other things you're going to want to check. Mainly under the Finance Act 2004, so you're going to want to be sure that it's a recognised transfer for the purposes of the Finance Act and a transfer from an occupational DC scheme to a master trust will be so that should be fine. If any of your transferring members have got Finance Act protection, so I'm talking here about enhanced protection or the various types of fixed protection, you'll also want to be sure it's a permitted transfer for the purposes of the Finance Act and transfers including partial transfers to registered DC pension schemes like master trusts are permitted transfers for that purpose so again that should be fine.

One that's slightly more difficult is where you've got other kinds of Finance Act protections and Emma referred to this when she was talking about barriers of change-so things like protected pension ages or rights to lump sum benefits exceeding 25%25 and they are only retained on a transfer if that transfer is a block transfer for the purposes of the Finance Act. The requirements for that are that it's a single transfer, the transfer is from one registered pension scheme to another and the tricky bit but the transfer value must include all sums and assets held for the purposes of the arrangement under the pension scheme from which the transfer is made and which relate to that member and at least one other member of the pension scheme. That can cause issues in hybrid schemes, which I will talk a bit more about later.

So, the second item on the slide and I'm going to talk about this very briefly because I'm going to talk about it in a bit more details in the next slide. So, as well as meeting those legislative requirements transferring trustees need to make sure that there's a power under their scheme rules to allow them to make the transfer.

And the last point on this slide and very important point, is the transfer in the members' interests. The trustees in making that bulk transfer without member consent are going to be exercising a just discretionary power they've got under the rules and so they need to consider whether it's in the interests of the members of that plan to exercise the power. They need to consider the interests of all the plan members, not just those transferring. So, if you've got a hybrid scheme and some people are staying behind, you need to think about them as well. The kinds of issues you need to think about- the trustees need to think about, are the benefits in the master trust compared with those in the plan that they're leaving, the benefit options available for members in the plan compared with the new arrangement, the powers in the master trust compared with those in the plan- and I'll talk a bit more about that in a minute- ,the financial strength security reputation in the market and administrative capability of the new DC providers over the master trust, investment options available in each arrangement, charges obviously are going to be key, how they compare in each arrangement and the impact on other benefits that a member might have in the scheme such as protected pension ages and lump sum rights.

So, on this slide I'm going look a bit more about what the rules themselves say, the rules of your scheme and how that could cause problems and the kind of things you need to check.

So, the first thing, the bulk transfer power. As I've already said trustees need to make sure they've got a power in their own rules which allows them to make a bulk transfer of members to a master trust without the consent of those members. So, then you're looking at your power, first of all checking to see whether you've got one at all, and if you have got one there are a few things you need to check. First that that power is wide enough to allow for a bulk transfer, so it's not drafted on the basis it's just individuals that are transferring. Secondly that it specifically allows the trustee to make the transfer without members' consent and that needs to be quite explicit and thirdly that it allows a transfer to the type of scheme that has been chosen, so in this context we're thinking mainly about master trusts. Luckily, the transferring scheme is a hybrid scheme and you'd only be keeping the DB benefits in that scheme or possibly transferring them somewhere else then the rule also needs to allow for partial transfers for those members who've got bot DB and DC benefits. And also, you should read the rule really carefully just to check there are no unexpected requirements in addition to those that are set out in legislation like strange things around consultation with members or something like that.

What do you do if that power is missing or if it doesn't have all the elements you want it that I've just been talking about. Well in the vast majority of cases the trustees would decide to use the scheme's power of amendment to amend the transfer rule or to insert one if you haven't got one so that it provides the powers that you need. Again you need to check amendment power to be clear there are no restrictions in it that would prevent those kinds of changes. I've never come across an amendment power that's so restrictively drafted that it would prevent that so far but you never know I suppose.

The amendment itself can be made in the deed which governs the transfer so you don't need a separate deed of amendment and Jo is going to talk a bit more about the documentation for making the transfer later on.

So, what else do you need to check? You need to go through your rules and check against the master trust rules to see how the balance of power compares in the two schemes. The trustee wants to be comfortable there's no material deterioration in the balance of power that they have under the master trust. So, for instance if the master trust has rules which are far more favourable to employers that could potentially erode protection for its members that they do have the benefit of in the transferring scheme so you need to check things like that and the key powers you're going to be checking are things like investments, winding‑up and amendments.

You also need to have a think about unexpected consequences. This is mainly going to be an issue if the transferring scheme has still got active members, so still some kind of accrual going on. And also, if it's a hybrid scheme so you've got DB accrual as well. So, double check whether you've got any risk there triggering Section 75 debt. If you've got a situation where one employer is ceasing to participate and another is continuing. Also, check there's no partial wind‑up trigger in that particular kind of scenario and more generally if you've got active members in your scheme, however you're ceasing that accrual whether it's simply by the transfer or whether you're going close the scheme first as we'd advise, then the employer has got a statutory duty to consult for 60 days about the proposal to cease accrual in the scheme so need to think about that as well.

And then lastly, protected and special benefits. So, have a look at your rules, see if there's anything unusual in relation to how the DC benefits work and how they interact with the DB benefits if you've got a hybrid scheme. So, that's my first point really is, if you've got a hybrid scheme sometimes, quite frequently in fact, members with DC benefits are allowed to use those DC pots as a first call for their pension commencement lump sum on retirement and the ability to do that would obviously be lost on a transfer. It's a benefit that a lot of members do value but there is a solution and we've seen in work in practice and a lot of master trusts are open to it which is for the trustee of the transferring scheme and the receiving scheme to agree to allow the members to transfer their DC benefits back as cash, the transferring scheme immediately before retirement to fund that pension lump sum.

Emma and I both alluded to protected benefits so we're talking here about protection ages, the right to take benefits earlier than the standard minimum pension age and also rights for more than 25%25 tax free cash. This can be an issue if you've got a hybrid scheme and you're trying to transfer the DC benefits out because the protected pension age or right to protected cash will be lost in relation to the benefits that transfer. They'll be retained in the transferring scheme but lost in the receiving scheme because these protections only transfer if, as I said earlier, the transfer is a block transfer and that would require the transfer of all the members' rights so that would be DC and DB which obviously wouldn't work in this scenario. So, if members might lose those rights then you might either want to leave them outside the scope of this transfer or only make the transfer with the members' informed consent which obviously then leaves you exposed to risks that they don't consent or they argue later on that they didn't fully understand what they were consenting to.

Another issue that would come up is underpins-DB underpins of various types, reference scheme, GMP and they are all worked differently depending on how the rules of the scheme around the underpin are worded. If there is some form of underpin, the trustees are going to have to look at it carefully and obtain specific legal and actuarial advice as to how it works and what your options might be. It's not always fatal, there can be solutions but it can be a tricky one. And other issues that can also crop up and need specific advice are things like with profits investments and guaranteed annuity rates, internal annuitisation and having some kind of DB type death benefit or else health benefit within the DC benefit structure.

So, they were the points I wanted to talk about so now I think it's back to Emma.

Richard: Yes, thanks Suzannah, just before we pop back to Emma and Helen, can I remind everyone to use the Q&A button, that would be great, those questions keep coming in. We've got a few already there so there's a couple probably for Emma after your first session. The first one is about scheme size, I'm assuming the question means asset size so is there a minimum value that is viable for this transfer process.

Emma: The short answer is no. I think it very much depends on kind of the motivating factors which isn't always cost. Often, we find it's actually the nervousness around continuing an increasing regulatory responsibility that actually often the trustees are concerned about. In terms of our own experience we certainly have undertaken projects that have ranged from actually no assets to be transferred across, it's for future contributions only so you're starting at zero, and we've done our fair share of those, right the way up to and sadly I can't mention the name yet but it's a household name that's about to hit the press that's a £1.5 billion transition, and everything in between so it's not just the cost of an exercise, sometimes that might be where you start but actually it's far bigger around what does the landscape look like, is this still fit for purpose today and probably more importantly are we comfortable with maintaining what we need to do going forwards.

Richard: Thank Emma, just a quick follow‑up from someone who has a GPP provision currently and what really would be the reasons, the advantages, of moving to a master trust from a GPP.

Emma: And that's a really interesting question because probably in the last 18 months, 2 years, or so we've started to see more employers with contract based schemes kind of look over the kind of parapet and say well what's all this master trust malarkey about then and so, yeah we certainly have seen a shift from it being prominently own trust type arrangements to more contract based schemes, considering it, not necessarily always moving but at least considering it and one of the main reasons we see for that is almost that master trusts are almost what contract based schemes used to be in a way but the market has kind of moved on and actually you might have an employer where they are sat there thinking well we chose a contract based scheme because we kind of wanted to outsource all of the responsibility. Now we're being told we need to look at things like the default investment strategy and make sure we're happy with that because to meet the DWP regs around auto‑enrolment, you know that's kind of not what we signed up for. What we wanted was this kind of outsourcing of the ongoing governance and that's what master trust gives. So, there's a level of interest there for sure but it's more as you say less around cost savings, more around future proofing and does this scheme that we have continue to be delivering what we wanted it to 10, 15 years ago.

Richard: Yeah, yeah, OK, thank you. Emma, there's just a quick one that I'd probably refer to Suzanne or Jo or even me on consultation. I think it's probably just clarification on this 60 day consultation. Is it a minimum legal requirement and you know when does it apply? Suzanne, are you alright to …

Suzanne: Yeah, sure. It applies if you are- well it applies in several scenarios but in this one we're thinking about here, it applies if you were going to cease accrual or some or all of the members of the scheme. So, if you are going to cease the accrual of the DC (assuming it's a pure DC scheme here), if you're ceasing accrual of all your DC members because you're thinking of transferring them to a master trust then yeah 60 days' consultation by the employer is the minimum requirement but it would also apply if you were going to transfer without ceasing accrual first because you're still in effect ceasing that accrual by transferring them across so in both scenarios it would apply.

Richard: Yeah, and I think sometimes we have been asked about hybrid schemes so you've got an old closed DC section for example, so there's no active members, but you've got active members in the DB section for example, but you can only consult as employer with your employees, you can't consult with those who've left the business and left service. So, it's a consultation about the effect on their DC benefits in this case and if they're not active members then question whether actually you've got anyone to consult with, yeah, just to be clear on that one.

OK, so we're back to Emma and joined by Helen as well.

Emma: Thank you. OK, so we're just going to spend just a couple of minutes on the actual provider selection process and what that looks like given it's such a chunky part of the whole change project. And down the left hand side there, nine nicely coloured boxes, and that just outlines our approach to the key assessment criteria that would feed into an RSP that would then be issued to potential providers. So, you can see there Suzannah touched on a number of these areas, each of which are incredibly important to get a real understanding of to enable, what's generally a joint working group of trustee and company, to reach consensus as to which provider might be the best fit for them. And I guess I'm labouring the point but unapologetic when I say that the importance of that collaboration just cannot be underestimated because effectively the trustees are dealing with the past, so the accrued assets, the members' money that has been built up to date, and the company is obviously looking forwards to their current and future employees and each of those elements are of equal importance in terms of driving the optimal solution. Kind of the optimal solution won't be achieved without both of those two parties kind of getting comfortable with where they want to go.

So the key assessment criteria as I say you can see what the kind of headline areas that we consider and generally speaking we see the trustees and the company assigning weightings to each of those areas. Now, sometimes the weightings are just equally divided because nobody can decide but more often than not actually there is a ranking order of priority and it's a health discussion and debate with both parties accepting there might be elements of compromise but actually then in the round with a very kind of clear focus on getting the best possible outcome. Often we see, historically, things like investment and administration attracting comparatively high weightings but more recently we've seen a focus on at retirement because there's a wide range of propositions out there from very very slick and to and through and consistent charging to actually more kind of bolt on type solutions so often we see a lot of focus on that piece as well.

Each of those nine areas are kind of underpinned by a database that we have that we run with the major master trust providers but includes hundreds of data sets because some of the elements, obviously the proposition, are pretty consistent in terms of particularly things like provider profile. You know, is this provider going to be around for the long term. That's been helped to a large extent by master trust authorisation where we've gone from 90 odd providers to 30 odd but still that can be a key element of certainty and assurance from both trustee and company. All of those things are in the mix. They feed into an RFP that again generally is issued jointly by the trustee and the company and then you get to your provider long list.

And one of the interesting elements, just moving to the right hand side there, that we've seen more and more is the desire to meet the master trust trustees, so as part of say when you get to a short list of maybe three potential providers, actually meeting the trustee board can be really helpful to get a real flavour around perhaps the less quantitive elements of a proposition. So things like diversity, level of experience, the split between perhaps provider appointed trustees and independent trustees, some of those things can really help influence what the right fit might be in each particular case. Clearly the independence point throughout this process is absolutely key, often we see the trustees being more insistent on mix and being nervous about this because they want to be able to look back and you know have a really solid audit trail as to who they got to where they did and then the default investment strategy. Again, I'm not going to steal Helen's thunder but I'm going to hand over to her I think at this point just to talk through again why this is such a key element of ultimately getting to the right place. So I hand over Helen to you if that's OK.

Helen: Yeah, thanks Emma and Richard if you could move on to the investment side, that would be great, thank you.

Yeah, I just wanted to spend a bit of time delving into some of the more investment related aspects of the transfer and the whole process really because there will be points along the way that will present some hurdles that will need to be overcome and the first of these is really around the default investment strategy itself. Now, as has been alluded to earlier by both Suzannah and Emma, the trustees ultimately will have responsibility to ensure that any receiving default strategy is suitable for their membership and so it's really important to engage with the trustees on the default investment strategy early on to avoid any situations where it might not be appropriate for their membership. Certainly we have had situations where a provider has been appointed and the trustees have been presented with a fait accompli and the provider is expecting a bulk transfer of assets because usually that is part of the contractual agreement but then the trustees and their advisers weren't able to get comfortable with it. So, that was just the first point I wanted to make.

The reasons, I guess, why there might be challenges around he default strategy and the investment fund options, there are a few. First of all, there's a chart here on the slide which is from some research that Isio completed across a sample of the master trust providers out there and really it demonstrates that there's quite a difference in terms of the approach and the asset allocation to the different default strategies so this particular chart shows the asset allocation for the growth phase so somebody who's about 30 years from retirement. Now, fundamentally, at a very high level we'd expect most people's strategies to have the same objectives so they'd be looking to achieve growth for early years and then looking to achieve a wealth preservation on the approach to retirement. But underneath the bonnet, the way they do that, both in terms of the asset allocation, the funds they use, the points at which de-risking is triggered can vary considerably and this can have a significant impact on expectations for members' outcomes. So, just to give you an example, some of the providers that we research, and I'm making no value judgment on the providers presented here, but some of the providers we researched are what we would consider too cautious in their growth phase. Some providers have a de-risking strategy that starts too early and our view is that that limits growth opportunity for members and some at the kind of pre‑retirement piece have quite high allocations to cash which in our view limits the potential for growth net of charges, but also can be a challenge in terms of achieving returns above inflation.

Another area that I think is fast moving at the moment is how environmental, social and corporate governance factors are embedded within default investment strategies and it is a key part of our research so that when we're looking at providers that we kind of test the fact that many of them will say that ESG is embedded but the extent to which it is done and the proportion of the whole of their assets that is covered can be quite different. And that can often be quite an important thing for employers, it's certainly something we're seeing increasingly higher on the list of objectives for a provider because employers are starting to appreciate the risks that are associated of not having ESG embedded in an investment strategy but also the fact that they want their pension scheme, which is clearly part of a benefit structure, to be as closely aligned to their corporate values as possible. So that's the bit about the default strategy and the variety that you will see in the market.

The next, I guess, hurdle that we come to is around deciding which funds to move the assets across into and we call this the mapping exercise. Now, quite early on in the provider selection process it's likely you'll receive an example or proposed fund mapping for the self‑select fund range and whilst this is really helpful from the perspective of you can see how like for like the future fund range will be compared to your existing often when it comes down to the practicalities which I'll come onto in two seconds that mapping doesn't always end up being as obvious as it first seems. So, some of the challenges that we have in this area is that when moving assets into a new fund that can trigger what we call a deemed default so the trustees need to be able to be comfortable that the receiving fund is going to be monitored on that basis so things like the charge cap and any governance around it. Now what we're finding in reality is that the master trust trustees aren't willing to take on that additional level of governance for their wider fund range. They'll do it for their off the shelf default but they're not willing to add that additional level of governance onto individual funds. It's just part of the way that the master trust is commercially designed. And so you can see how you know the easy like for like mapping that might have been proposed isn't going to work because from a legal and fiduciary perspective the trustees aren't able to actually transfer assets into that fund on a non‑consent basis.

There are ways around it and there are small details that you can kind of work through but without going into those details I think it's fair to say this is the point probably where you do see a lot of collaboration between the legal advisers, the investment advisers and your DC consultants and what I would flag is that often the kind of like for like mapping that was presented early, it's highly unlikely to be how members assets ultimately map across.

The final point I wanted to touch on is the asset transfer itself and clearly this is the area of a big concern, there's reputations at risk, members clearly we want to manage that they're not exposed to any undue costs or risks that can be avoided. And the types of questions that need to be asked are, are members incurring costs, who covers those costs, is it actually the members or should it be the employer or even can the provider cover those costs. We do see a variety of approaches and asking that question early on in the selection process can actually be helpful from a negotiation perspective.

The other key question is will members be exposed to any out of the market risk while the transfer is taking place. So this is when there's obviously assets are sold at a certain point in time and how closely aligned is that buying point in time that the purchase happens. If there's a gap then that means that members could be negatively impacted by market movements when they are not invested.

So, those are the two key areas that as an investment adviser we'll be looking to get to the bottom of and often our clients have found it really valuable to have a CO's transition team providing this oversight, an independent oversight, to make sure that costs are reduced as much as possible, out of market risk is reduced as much as possible. Where promises are made around there being no costs and no out of market risk that this is verified and ultimately really just providing the trustees and the employer with confidence that members' assets are going to end up where they are intended.

The final point I'd make on the asset transition piece is that this is actually a really valuable engagement point for the employer, so a well-managed, well communicated transition exercise can really be quite powerful in terms of the employee seeing the value in the new scheme.

So, those are the three main areas I wanted to cover today. I think in conclusion there are hurdles here that will have to be discussed and overcome. Some of these hurdles can provide quite a bit of strain on relationships and resourcing if introduced quite late in the date in this whole process. So, we would definitely recommend that they can be completely avoided by early collaboration of trustees and advisers. Certainly there are some elements here that do have the potential to derail a transfer but some good planning and good collaboration can overcome it.

Thank you.

Richard: Right, thanks Helen. We've got about 10/11 minutes left so over to Jo who I think it going to speak for about 10 mins or rather not more than 10 minutes and we'll pick up the questions coming in. We've got a couple, we've got three or four more questions coming in so keep them coming. Thanks Jo, over to you.

Joanne Tibbott: OK, thanks Richard. So, if you could just move onto the first slide, thanks very much.

So, Suzannah talked about the legal issues that you need to think about when you're deciding whether or not you can as trustees or as an employer, whether you want to implement such a proposal. So, I'm just going to have a look at the legal documentation to actually implement the transfer.

So, as you'll see from the slides, there's four key documents really that need to be considered and I'm just going to take you through each of those in turn and just really highlighting the key points that we tend to look at.

So, the first one is the transfer deed which as it says on the tin, it deals with the mechanics of the transfer to the master trust. It will usually be an agreement between a transferring trustee, the receiving trustee and, assuming there is going to be ongoing accrual for the employer in the master trust, the employer or employers will also become participating employers. As Suzannah mentioned, sometimes amendments are needed to the transferring scheme rules and to save faffing around with lots of different documents we typically just deal with the amendments in the transfer deed is a separate deed of amendment hasn't already been done. And I think it's fair to say that most of the master trust transfer deeds that come across our desks are generally in pretty reasonable shape. I think master trusts providers now know what trustees and employers expect in order to implement the transfer and it's a very well-trodden path. Having said that there are some key provisions that we will always check for our trustee clients just to make sure that they've got the best position possible set out in the agreement. I think the success sometimes of those negotiations will depend sometimes on the value of the transfer but generally as long as they are sensible about it we generally get to a good place on these issues.

So, the first thing is obviously we want to make sure there's a clear obligation on the new trustee to provide benefits from the transfer date. As Helen mentioned, there can sometimes be a bit of a lag between the transfer date and the physical transfer of assets while things get disinvested and I'll come on to talk about pre‑funding letters of indemnity shortly. It's also really important that we have proper provisions in the transfer deed dealing with the investment transition and making sure that the obligations on the transferring trustee aren't too onerous in that regard.

The second one is that we want to be certain that the transfer won't go ahead until certain conditions have been met. So, quite often you'll sign the transfer deed but the transfer won't happen until a later point in time. So, for example conditions include things like that you've given one month's notice of the transfer to your members, that obviously the receiving scheme has got all of the data it needs to have before the assets land and they have to set up member records etc. They're usually very standard provisions that we see but obviously some transfers can have specific quirks that we need to deal with. The benefits to be provided are often documented at a high level in an appendix and I think the important point here is that yes the transfer deed is a legal document and the legal advisers need to review it but it's also important the commercial terms are reviewed by your other advisers to make sure for example that the fees that are set out in that schedule are correct and also the default arrangement or any specific investment arrangements are properly documented as well.

Just a couple more points just to flag. So, warranties, they'll always be warranties in nearly every legal document where there's a transfer or acquisition involved and there are statements of fact that the parties to that agreement have to give. If those statements of fact turn out to be incorrect then the party has relied on those statements can potentially claim for damages if they've suffered loss from the party that's given that statement.

So, one example that we typically see is a statement that there's no benefits with guaranteed annuity rates attached to them for example because if it turned out that there were that's potentially a liability that the master trust trustee will have to deal with and will want someone to go back and claim for the expenses if dealing with that.

So, again these are fairly standard provisions but it's really important that as trustees who are giving them that you're comfortable that you can provide the benefits, sorry statements.

And then finally, liability. It's really important for us to check that there's no unreasonable liability provisions that expose the trustees or the employers to an unacceptable level of risk and also to check that the liability cap that the master trust provider and trustee are seeking to impose on you is reasonable in the commercial context of the transfer. And something that's been a bugbear for a lot of us who are sort of dealing with projects during the Coronavirus period is execution. It sounds straightforward and certainly when you've got a corporate trustee it is but if you've got individual trustees all of whom have to sign this deed just bear that in mind when you're doing your project planning. It can be quite a clunky process.

Secondly and just very briefly, master trust deed and rules- as Suzannah said we'll do a quick check of these just to make sure the balance of powers is correct and also that the master trust which it will do has the power to accept the transfer and that's properly recorded in the merger deed.

The next document, which is quite important, is the pre‑funding indemnity. So, unless the asset transfer is happening in specie so there's no need to disinvest there is potentially an out of market risk there for members and to protect against that risk the providers to whom the assets are being transferred will often advance funds if you like to guard against that risk so the units can be purchased in advance but obviously they want some kind of assurance from the transferring trustees that if the funds transfer late for example that they will have some kind of recompense.

Again, these are pretty standard documents but there are some key points that we look out for. So for example making sure that the expected date by which you have the make the transfer is doable and reasonable so that any penal provisions that are in that letter don't kick in when it's just impossible for you to hit that date and also checking again that any indemnity provision in there is sensible and not too wide.

And finally, if there's any interest payable if that expected settlement date is missed that the interest rate is reasonable as well. But I have to say I've done quite a few of these and I've never come across a situation where these letters have had to be engaged, I don't know if anyone else has different experiences but it's still important to make sure that if you did have to rely on them they do what they need to do and you're not put in an adverse position.

Deed of participation, again a pretty standard document that master trust providers will issue to allow the employer to become an employer in the master trust if indeed its employees are accruing benefits in that arrangement. As we would also expect there to be a schedule to that agreement, or a separate agreement, which just sets out the commercial terms. And again it's really important to review those properly to make sure there's no sort of nasty hidden surprises in there. But again, I wouldn't expect there to be.

And then just turning to the last slide Rich, I think I've got a couple of minutes and then hopefully we'll have a couple for questions.

Richard: Yeah.

Joanne: So, just on member comms, so a couple of things to mention here. So, first of all you have to as trustees if you're transferring without consent give one month's notice of the transfer to your deferred members. But I think it's also an opportunity, particularly if you haven't run a consultation process with employees who have less left the business, to actually reassure them about why this transfer is happening and what it means for them. So, usually these documents, yes we review them from a legal perspective but I think there is a wider piece there to make sure they work and really pre‑empt any or deal with any questions that you might otherwise get. I think provider comms tend to be very good so they'll issue welcome letters etc. and they have a lot of resources which once you're part of the master trust that you can actually use and are very helpful but I think it's important for employers to have a look at those communications just to make sure they do what you want them to and I know in some circumstances it is possible to tailor those with employer branding etc. to make them feel a bit more part of the organisation which the employers are in for example.

And then ongoing communication. So, this is quite an interesting one so, once a transfer has happened is that it or does the employer want to set up a governance committee to act as oversight for the master trust. The master trust is very well run but I think sometimes the employer likes to have that line of communication in and if you are doing that just make sure that you're terms of reference are clear and responsibilities, decisions are properly documented.

And then finally, very quickly, sorry I'm rattling through this now. Winding‑up. I think the point to make here really is that generally if you're winding‑up a pure DC scheme that is relatively straightforward once everybody is transferred out. There are certain protections for example indemnity from the employer or insurance that we'd recommend that trustees get in certain circumstances, particularly to guard against any legacy issues arising so if a missing beneficiary pops up. I mean, that would be dealt with in the transfer agreement but there still could be costs associated with dealing with that.

And then finally, winding‑up lump sums. These are lump sums that can be paid when a scheme is winding‑up and the members benefits are £18,000 or less in value. If your employer comes to you and says we want to do one of these because we've got a lot of people with small benefits we don't want the added cost of transferring them to the master trust and then the admin costs associated with that, it is possible to do but just make sure you speak to your advisers because there are certain conditions that have to be met to prevent tax charges arising.

And that's me done Rich.

Richard: Fabulous, thank you very much. So, very very briefly a couple of last questions. Maybe one for Suzannah and Jo. Any obligations on the transferring trustees once the transfer has gone to monitor the master trust at all.

Joanne: No.

Richard: No.

Joanne: No, there we go. Sometimes the employer might want to as I said through a governance committee but the trustee

Richard: Yeah I know. General timescales for these projects. Maybe one for Isio.

Suzanne: Yeah, so I think for a reasonably straightforward one where we're talking about maybe one or two schemes as opposed to 25, then 9 to 12 months.

Richard: 9 to 12, OK. Thank you very much. And finally, well penultimate question, major reasons why these projects fail. Maybe just one or two key reasons.

Joanne: I don't think I've seen any fail. I have seen some being put on hold at the moment just cause of the impact of Coronavirus and where members' pots might be and it just felt the wrong time to communicate to people about this type of exercise, that they were already feeling nervous. But I haven't seen any fail provided you do a really good feasibility at the outset, I don't know Emma and Helen if that's similar to your experience.

Emma: I think for me it's just, it's the point I made earlier, it's the collaboration and that not happening so we've certainly seen a couple of car crashes, one company side, one trustee side where that party kind of steamrolling through the exercise and then almost presented it, I think Helen mentioned, as a fait accompli to the other party and that didn't go down well and, actually, in one case they actually had to go right back to the beginning, effectively pay twice, to do the exercise as a joint working group. So, it's absolutely for us, I think that's what's going to cause all the pain, if you don't get that early buy‑in from both parties.

Richard: OK. That explains much. There was one final one for Helen Wobbly just on, I think you touched on ESG and let's face it all of us get 50 emails a week about ESG. So, this won't cover that in detail but employers might be interested in you bespoke investment arrangements and strategies including ESG within a master trust and can that be done and if so, what have you seen.

Helen: Yeah, no, oh that sounds bad then Richard, handing back to me. Are you OK.

Richard: Yes, I can hear you, yeah.

Helen: Yeah, OK, fine, sounded very echoey at my end,

Richard: OK.

Helen: Yeah, I think this will probably tie up, there's a couple of questions around dual governance and designing your own bespoke default investment strategy and I think the quick answer is yes you should be able to design something that's bespoke if you've signed up on a dual governance basis and for those that don't know, that presents, it means the employer has to sign up to undertaking a bit more on the side of governance, so receiving independent advice, ongoing monitoring etc. So, some employers, that's what they're trying to get away from. But it is possible to have a bespoke design under the dual governance for most of the master trusts. It will be subject to the fund range that's available, subject to having independent advice and also there will be a degree of consultation with the master trust trustees to kind of get that over the line. In terms of the ESG specific point, it's certainly something we're seeing evolving now. At the moment it's probably a little bit restricted by the fund range that's available under dual governance ranges which is broader than that you'll get under a sole governance range and I think the advice I would give is that if this is a key thing for you then it's really worth, you know you want to be flagging it at the provider selection stage. I suspect most providers, even if they don't have something available currently, would be willing to engage on this because I think there's going to be appetite from the market generally. But yeah, I would definitely be flagging it as a requirement early on and certainly with some of the providers there is scope to do more in that area.

Richard: OK. Thank you, thank you very much. I think my clock now says 12 o'clock although it might be four minutes slow and so I think I'll say thank you to the speakers Emma and Helen from Isio and Suzannah and Jo from Gowling. I'm going to deal with the most difficult question of all to come in. Yes the slides will be available next week. We send around an email with a link so that will be sent out to all of you. Thanks for your participation and for all the Q&As and we'll see you soon on the next webinar. Thank you very much and goodbye.

Bye, bye.