Retirement plans in the U.K. and this country are a lot alike. Employers in both countries have shifted from defined benefit plans to defined contribution plans. Employers in both countries use a trust-based system complete with fiduciary responsibilities. And employers in both countries are understandably trying to limit their exposure to fiduciary liability. U.K. employers, however, are trying to offload any risk by entering into what is called “contract-based plans.”
These are arrangements in which the employer hires a single provider such as an insurance company or an asset manager to run what’s essentially a series of individual pension policies. Beyond hiring a single provider, the employer has no responsibility for investment manager selection, fund monitoring, or employee education.
These contract-based plans seem to be gaining in popularity. According to the 2007 annual survey released by the the National Association of Pension Funds (NAPF), 56% of the U.K. defined contribution plans surveyed were trust-based plans compared with 89% two years earlier. The NAPF, a London-based industry organization representing more than 1,000 pension funds in the U.K., says that
This might suggest that some of the employers who have most recently closed their DB schemes to new entrants have substituted contract-based DC arrangements.
I take that as typical British understatement as many smaller employers have already made this change with more expected in the future.
So how do the regulators in the U.K. feel about employers trying to avoid governance responsibilities? Apparently, not enough by our standards. In January, The Pensions Regulator, the government agency that oversees all U.K. employer-sponsored pension plans, issued guidelines that encourage contract-based pension sponsors to voluntarily set up their own governance arrangements. There was no requirement requiring companies to follow its recommendation.
All of this is, of course, in marked contrast to ERISA’s requirement that fiduciaries are responsible for monitoring service providers. It takes me back to those thrilling days of yesteryear, pre-ERISA, during which most pension plans were individual policy plans purchased from life insurance companies. The remnant of which today are 403(b) plans. But that’s changing fast. (Here is a link to several 403(b) posts on Baker & Daniels BEC team’s new and excellent Benefits Biz Blog and to two of my own from last year, If it looks like a 401(k), acts like a 401(k), and sounds like a 401(k), then it must be a 403(b), Part I and Part II).
Source: March 31, 2008 article in Pension & Investments by Thao Hua, "More U.K. companies turn to contract plans. But alternative to trust-based DC plan may not be safeguard."