If you help clients to run schemes that offer mixed benefits (sometimes known as 'hybrid schemes') you need to manage defined benefit (DB) elements as if they were a DB scheme and manage defined contribution (DC) elements as if they were a DC scheme.
You need to have an in-depth understanding of the scheme structure and the benefits the scheme offers.
- 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 mixed benefit scheme
Schemes offering a combination of DB and DC benefits 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 scheme offering mixed benefits 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 'Bridge 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.