FSA warns insurers off bypassing RDR through trust-based schemes

The FSA has written to insurers telling them attempts to bypass the Retail Distribution Review for group pensions by switching to trust-based propositions will not be acceptable, Corporate Adviser has learned.

The regulator has written to the ABI telling it attempts to ‘subvert’ the RDR by moving to trust-based arrangements will attract intense attention.

But the ability to refund employee contributions and retain those of employers in the first two years will remain, making trust-based schemes more attractive to some larger companies, said delegates at the Corporate Adviser DC Summit this week.

Andy Barton, employee benefits and direct distribution director at Scottish Widows, said the FSA’s retail distribution review (RDR) was likely to prohibit employers from setting up schemes as a means of reducing their auto-enrolment bill.

“In the last couple of weeks the FSA has made clear it doesn’t like the idea of synthesised trusts, or occupational schemes generally, being used to sidestep the RDR requirements,” Barton said.

Trust-based currently remain the sole way in which employees can have their contributions refunded should they choose to exit the scheme within two years of membership, leaving the employer able to recoup their own contributions. Such a situation is not permissible under contract-based arrangements and will not be allowed in the proposed system of Personal Accounts.

Barton added: “It’s early days but it’s likely there will be some regulation or enforcement that means that we get back to a level playing field [between contract and trust-based DC].”

Steve Herbert, head of benefits strategy at Origen, said setting up a trust-based scheme “smacked of avoidance” and added that most small and medium-sized employers preferred the simplicity of contract-based arrangements.

“Most SMEs wouldn’t want the extra hassle of setting up a trust based scheme which we have be moving away from over the last few years; setting one up now for this reason would be short sighted,” Herbert said.

Paul Gilbody, head of product and scheme promotion at the Personal Accounts Delivery Authority, said refunding employee contributions ran contrary to the government’s objectives for the nationwide pension scheme.

“The majority of our target market will be going from job to job; if you refunded their contributions it could leave them with nothing and undermines what we are trying to achieve,” Gilbody said.

However, he added that trust-schemes remained a valid option, but employers had to be certain they were implementing an appropriate scheme for their employees.

He said: “There is a place for trust-schemes in the market and it’s up to employers to decide they are doing the right thing for their employees.”