Defined contribution (DC) contract

What is a contract-based DC scheme?

Defined contribution (DC) pension schemes are the dominant form of pension provision in the UK as the cost of guaranteeing defined benefit pensions based on salary and years of service becomes increasingly unsustainable.

DC schemes offered on TargetPlan include group personal pensions (GPPs) and stakeholder as well as support for trust-based DC schemes.

As the name suggests, the pension pot achieved is reliant on the level of contributions made by the employee (and employer) during their working life – and on any investment growth achieved.

From age 55 onwards, the employee can use their accrued pot to withdraw cash, buying an annuity or move to an income drawdown arrangement to generate a retirement income. This is also true of a DC trust based scheme.

Contract-based vs trust-based DC schemes 

Aegon can support DC schemes that are either contract-based or trust-based. The main difference between the two is in the way they are managed and the level of oversight that is provided to members:

Trust-based DC schemes
Trust-based DC scheme
Run by an employer through an appointed board of trustees
The trustees have a fiduciary duty to act in the members’ best interests
Assets are legally ring-fenced away from sponsoring employer’s assets
Regulated by The Pensions Regulator and the Financial Conduct Authority
Contract-based schemes
Contract-based DC scheme
A third-party plan provider who will manage all aspects of the scheme
Operated on the basis of a contract between the member and the plan provider
Each member has their own
ring-fenced policy
Regulated by The Pensions Regulator and the Financial Conduct Authority

In short, contract-based pension schemes remain individual contracts between the member and the pension provider, with no fiduciary duty imposed on the sponsoring employer. Contract-based schemes do not have to have a trustee board to look after member interests although some employers may set up governance boards to monitor contract-based schemes.

There’s also an FCA requirement for the plan provider to put an IGC in place – Aegon’s IGC acts as a customer advocate by reviewing whether our workplace pension provides value for money. This committee challenges us to clearly define our value for money principles and address anything which they suspect isn’t meeting these principles. They ultimately help to raise consumer confidence in pension saving which is good for our customers.

Who are contract-based DC schemes best suited to?

Contract-based schemes tend to be favoured by employers without the experience or resources to maintain a trustee board. 

However, increasingly, master trusts are being used to give employers the reassurance that scheme governance requirements will be met without the responsibility of running a trust-based scheme.

  • Occupational DC & AVC schemes – investment-only service
  • Occupational DC & AVC schemes – investment and administration
  • Aegon Master Trust
  • Group personal pensions
  • Group stakeholder pensions
  • Trustee Transfer Plan buy-out contracts
  • Flexi-access drawdown

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