Pensions specialist David Davison has queried why the troubled charity sector pension scheme Growth Plan was not closed last year. Logan Anderson, head of customer relations at the Pensions Trust, explains why.

The reader can be forgiven for examining the motives of the trustee for keeping the Growth Plan open.  The same reader might also want to examine the motives of those who would call for the scheme to be closed.

It’s true that the Growth Plan could have closed last year. Or the year before. Although it’s the Pensions Trust’s founding scheme, the Growth Plan could have closed at any time in its 67-year history. So, what would have made the trustee close it? In short: member interest and employer interest.

Member interest is the trustee’s primary duty; that is the financial interests of the members of the scheme. Many schemes have closed to future accrual over the last few years because of concerns over the ability of the sponsoring employers in the scheme to maintain and fund the (defined) benefits in the scheme. Concerns over the ability of the Growth Plan to continue to meet future benefit promises prompted the trustee to take action in 2001 by closing the deferred annuity arrangement and launching Growth Plan Series 3. Indeed, the deficit contributions which commenced in April 2013 are based entirely on this pre-2001 benefit, not Growth Plan Series 3 or Series 4.

In the case of the Growth Plan, the trustee has very few concerns that the 2,000+ employers in the scheme won’t be able to fund the benefits. This is in part due to the underlying financial strength of the employers but also because future benefit accrual will not give rise to any additional deficit.

So, in exercising its primary duty to its members, the scheme doesn’t need to close to future accrual.

And what of employer interest?

It is the employers who agree the benefit structure with the trustee. In 2011 following the announcement by the Department for Work and Pensions of the change in the definition of money purchase the trustee again considered the future of the Growth Plan. The Growth Plan Employer Consultative Group, which is elected by all the employers in the scheme, expressed a preference for keeping the Growth Plan open to new contributions. The view was that employers would prefer to continue to manage the risk of triggering a section 75 debt rather than have to find an alternative pension scheme for future accrual.

This was backed up by feedback from employers themselves, suggesting a reluctance to find an alternative pension scheme for future accrual. Some 85 per cent of Growth Plan employers that responded to a survey we conducted on auto-enrolment said that they envisaged using their existing Pensions Trust arrangement for auto-enrolment purposes.

As an alternative to closing the Scheme to future accrual the trustee decided to close Series 3 to new contributions, mitigating any risk to employers associated with Series 3 being classified as a defined benefit arrangement. From 1 October 2013 all future contributions will be paid into Series 4, which following the launch of SmarterPensions now includes a much wider range of investment options for members to choose from.

The trustee did not take the decision not to close the Growth Plan to future accrual for commercial reasons but in response to feedback from employers and also based upon knowledge gained over many years of working with employers in the sector.  

Many of the employers that participate in the Growth Plan are small organisations with limited resources and little access to expensive professional advice. Our experience suggests that such employers would prefer to continue with existing arrangements rather than be burdened with the challenges and costs associated with making changes.

Whilst the decision to keep the scheme open was not made entirely with employers in mind, the decision to keep the scheme open has had a number of positive implications:

•    Employers have not had to find alternative future pension arrangements, though of course they are free to do so.

•    Employers have had the choice to move away from Series 3 liabilities for some five years now.

•    The adoption of the latest defined contribution (DC) fund investment, with AllianceBernstein’s market-leading Target Date Funds approach, should lead to better outcomes for all, not just those of a sufficient size to be able to shop around.

•    Growth Plan Series 4 is DC in its entirety. If the trustee thought there was any risk that the Scheme and employers would be exposed to further risk should future legislation applicable to defined benefit multi-employer schemes change, it would have closed the scheme.

•    Employers moving to the SmarterPensions platform are able to benefit from the Target Date Funds approach for their members at a very competitive cost of 0.45% per annum.

•    Employers have the benefit of being able to maintain the trust-based provision, whilst still having the option to go elsewhere (to contract-based provision perhaps?) should they be able to manage and afford the associated governance costs and be prepared to manage the risk should future legislation applicable to these contract-based arrangements change.

While trusteeship is not a popularity contest with its employers, continuing the Growth Plan has been something that was demanded by the employers themselves. It has not been universally popular with all. There are some who would undoubtedly gain from the vacuum that would be left with the closure of the Growth Plan and it is perhaps with this thought in mind that the reader should make his or her own judgement.

Read why David Davison thinks that Growth Plan should have closed last year here. 

Logan Anderson is head of customer relations at the Pensions Trust