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Key points

  • You need to have an in-depth understanding of the scheme structure so that you can advise on how to manage potential risks.
  • Ensure there are robust systems and processes in place to separately identify and manage the assets attributable to each type of benefit.

Types of hybrid scheme

Hybrid schemes include a combination of DB and DC benefits. Examples include:

  • separate DB and DC sections under one trust
  • DB scheme with a DC underpin, eg a scheme that will pay a member the better of their DB or DC benefit
  • DC scheme with a contracted out element on a DB basis
  • DB schemes with a DC top-up.

Potential risks to members

To advise on how to manage a hybrid scheme you need to have an in-depth understanding of the scheme structure and the benefits the scheme offers.

If you do not understand and don’t advise your client how to manage the scheme appropriately, members will face a number of potential risks:

  • lack of governance
  • unclear and incorrect member communication
  • incorrect benefits and funding levels
  • inappropriate investment strategies
  • failure to offer the correct retirement options for DC members.

Checking the status of money purchase benefits

The statutory definition of money purchase benefits changed with effect from 24 July 2014. Schemes may be affected by this change if they offer benefits that have the potential to develop a funding deficit, ie non-money purchase benefits.

You may be asked by clients to provide advice on how the changes affect their scheme. For more information on the amendments, see our statement on changes to the definition of a money purchase benefit:

You can also find detailed guidance from Department for Work and Pensions on money purchase benefits in pensions law: guidance on changes from 2014.

Ensuring robust systems and processes

You need to advise your clients to exercise good governance over the scheme by having robust systems and processes in place. This will ensure they can separately identify the assets attributable to each type of benefit. Where you undertake services outsourced by your client you should also have robust systems and processes in place.

If you are a scheme administrator you should carry out the following actions.

  1. Use separate bank accounts for DB and DC monies to avoid mixing assets.
  2. Provide information to trustees that shows the DC assets are identifiable at all times. Report regularly on the robustness of systems and processes to ensure that DC assets are separately identifiable.
  3. Ensure member communications clearly state the different benefits held for members, including what happens in the event of a scheme wind-up.
  4. Provide reports on regular reconciliation of DC and DB assets carried out and cash flow statements, detailing movement of monies at a DC member level.
  5. Offer the open market option and statutory money purchase illustration to members with DC entitlements in line with legal requirements.
  6. Ensure individual member data accurately reflects and separates DB and DC entitlements.

If you are an employee benefit consultant or other adviser you should carry out the following actions.

  1. Ensure advice to trustees on hybrid structures states the advantages and disadvantages of such schemes and considers the employer’s future growth strategies.
  2. Offer appropriate investment choices to DC members that consider the member population’s risk appetite. Where the same investment funds are used for DB and DC members, the approach should be justified and there should be clear segregation of assets.
  3. Ensure advice to trustees and employers states the winding up strategies for hybrid schemes, their complexities and the different safeguards (including Pension Protection Fund) offered to DB and DC members.

In general, you must manage the DB elements of hybrid schemes as if they were a DB scheme and manage the DC elements as if they were a DC scheme. Go to the sections on DB scheme management and DC scheme management.

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