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Out-Law News 2 min. read

Defined contribution pension scheme members up by 14% as auto-enrolment effects begin to be felt

Over 2.6 million people are now members of an occupational trust-based defined contribution (DC) pension scheme, according to new figures published by the Pensions Regulator which show that the Government's automatic enrolment programme is beginning to take effect.

Pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, said that as more employees were enrolled onto these schemes, employers would have to be even more careful to demonstrate compliance with their legal and regulatory requirements.

"The number of members primarily or solely reliant on DC for their income in retirement is growing with the increasing popularity of these schemes," he said. "The average pot size at retirement indicated by the Pensions Regulator's figures demonstrates a likely mis-match between expectations for retirement and the financial reality."

"As members start to approach retirement and realise the bad news, they will ask questions. Without a clear audit trail demonstrating compliance with legal duties, employers and trustees will be vulnerable to successful claims. Taking DC seriously is not just a nice thing to do, or a tick box exercise for regulatory purposes – it is risk management," he said.

The average size of a DC scheme member's pension pot at retirement is currently £25,000, according to the Pensions Regulator.

The figures cover the memberships and assets of around 40,000 DC schemes managing over £30 billion in assets as of 31 December 2013. They show that the number of members of DC pension schemes increased by 14% during 2013, from 2.2m to 2.6m, and that DC memberships now account for 30% of workplace pensions memberships - up from 27% at the same point last year.

The figures show a particularly steep rise in membership of DC master trust schemes, from 250,000 to 380,000 members. The total number of these schemes with 12 or more members also increased, from 44 to 49 such schemes. Master trusts enable pension scheme providers to manage a DC scheme for several employers under a single trust arrangement, making them particularly suitable for smaller businesses that do not necessarily have the resources and skills to run a dedicated pension scheme to meet their auto-enrolment requirements.

Up to nine million people will begin saving more towards their retirement or saving for the first time under the Government's automatic enrolment programme, which began for the largest employers in October 2012. The vast majority of those savers will be enrolled into DC schemes, under which the benefits provided on retirement depend on the performance of the saver's investment. This means that it is the scheme member, rather than the employer, who bears the full risk of the pension losing value.

A new DC code of practice (58-page / 343KB PDF), setting out guidance on how pension trustees can meet their legal requirements, came into effect on 21 November 2013. The new code contains a number of 'DC quality features' that outline best practices trustees are encouraged to adopt incorporating areas such as risk management, investments, ensuring the security and liquidity of pension scheme assets and monitoring and reviewing strategy.

Darran Burton, the Pensions Regulator's head of DC regulation, said that although the data did not fully reflect the volume of new memberships into DC schemes as a result of auto-enrolment due to the staggered dates on which schemes complete their returns to the regulator, it was clear that the reforms were "already having an impact on the DC landscape".

"We are seeing an increase in the number of members, as well as participating master trusts," he said. "We recently published our DC code of practice and will be stepping up our work with pension schemes to ensure good practice is embedded across all trust-based schemes during 2014."

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