Meeting documents

Pension Fund Committee
Friday, 15 November 2002

PF151102-12

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ITEM PF12

PENSION FUND COMMITTEE - 15 NOVEMBER 2002

PERFORMANCE OF ADDITIONAL VOLUNTARY CONTRIBUTIONS (AVC) PROVIDER

Report by Director for Business Support & County Treasurer

Introduction

  1. The Local Government Pension Regulations require the administering authority to appoint an additional Voluntary Contributions (AVC) provider. The purpose is to fulfil the statutory requirement of section 12 of the Social Security Act 1986, which is to provide facilities whereby members may elect to pay additional contributions. Additional contributions, within Inland Revenue limits, can be used to provide additional benefits in the event of a death in service or to provide additional benefits at retirement. These contributions do not form part of the Pension Fund and do not require an employer’s contribution.

  2. The Council carried out a full review of AVC providers in 1988. The Council appointed Prudential to be the AVC provider for the Oxfordshire Pension Fund.

  3. On the advice of the District Auditor, a report was submitted to the Investment and Pensions Sub-Committee meeting on 6 February 1998. It was agreed that the County Treasurer would report each year on AVC performance drawing on the annual survey carried out by the pensions consultant, Watson Wyatt.

    4. The Watson Wyatt AVC Survey 2002

  4. This is the fourteenth annual survey, which compares performance of all the major AVC providers as at 1 March 2002. The comparison of Prudential with the median for all providers is set out in the table below.

    5.  

    AVC Provider

    % Performance per annum to 1 March 2002, based on monthly contribution of £100 for With-profits AVC contract

     

     

     

    Prudential

    Median for all providers

    Three Years

    6.9

    6.0

    Five Years

    8.3

    6.9

     

    Ten Years

    10.6

    9.4

    NB. The table indicates that Prudential is well above median performance in all periods.

  5. Prudential have become the dominant player in the local government AVC market as a result of Equitable Life’s withdrawal. The Watson Wyatt survey indicates that Prudential have £2.27 billion of funds under management compared with the next highest, Standard Life, which has £275 million under management.

    6. Levels of Take-Up Among Scheme Members

  6. The level of take-up provides an indication of whether the AVC provider is being proactive and providing a valued service. Most local government schemes have experienced low levels of take-up and in Oxfordshire’s case this prompted a re-launch and proactive campaign in 1995. As a result, it was reported that the percentage take-up in 1997 was 6.7% compared with the average for South East County Schemes of 3.5%. There have been no inter-authority comparisons since 1997 but take-up in Oxfordshire has risen. In the year ended 31 March 2002 the level of take-up was 10.7% of membership, slightly down on last year’s figure of 11.1%.

  7. The Investment and Pensions Sub-Committee agreed in February 2001 to offer the full range of investment choices available within the AVC contract. This will have increased the attractiveness of the scheme although it will not necessarily lead to an increase in take-up.

  8. It is still too early to identify whether the introduction of Stakeholder Pensions will have a significant impact on the scheme. A Stakeholder Pension, as compared to an AVC, offers additional choice and portability without increasing management charges. This may lead to a gradual decline in take-up from those eligible to take out a Stakeholder Pensions i.e. those with salaries below £30,000 (net) per annum.

    9. Conclusion

  9. An AVC provider is not normally appointed on a fixed term contract. The cost of change and the administrative work involved would be significant. The appointment would therefore continue until such time as a review becomes necessary e.g. as in the case of Equitable Life or essential e.g. when performance is poor, take-up is low or communications with scheme members and/or employers is inadequate.

  10. None of these factors apply at present and Prudential continue to offer high standards of administration, which is a very important requirement. There are therefore no grounds for suggesting that a review of AVC provider is necessary.

  11. However, there are grounds for a more fundamental look at the AVC scheme as a whole. The Watson Wyatt survey concluded that, following the events of the last year [with Equitable Life], trustees need to instigate appropriate selection and governance processes to ensure that AVC arrangements meet the changing needs of pension scheme members. The survey also conclude that there is an overriding need for clear, regular communication to members in relation to pension planning not just confined to AVCs but also to the various alternatives that deserve equal consideration.

    12. Financial and Staff Implications

  12. There are none.

    13. Environmental Implications and Implications for People Living in Poverty

  13. There are no implications arising from this report.

    14. RECOMMENDATIONS

  14. The Committee is RECOMMENDED to:

          1. receive the report; and

          2. ask the officers to take a more fundamental look at AVCs and report to the Committee at the earliest opportunity.

CHRIS GRAY
Director for Business Support & County Treasurer

Background Papers: "AVC Survey Results 2002" – Watson Wyatt

Contact Officer: Barry Phillips, Tel: 01865 - 810805

November 2002

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