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ITEM PF18
PENSION
FUND COMMITTEE - 21 NOVEMBER 2003
PERFORMANCE
OF ADDITIONAL VOLUNTARY CONTRIBUTIONS (AVC) PROVIDER
Report
by the Head of Finance
Introduction
- 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.
- 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.
- 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 the AVC provider drawing
on the annual survey carried out by Watson Wyatt.
- The need for a
regular review of the AVC provider was emphasised in a case brought
before the Pension Ombudsman in 2001. An AVC payer complained that her
employer, the University of York, and the trustees of her employer’s
pension fund had failed to take action when the investment returns of
the scheme AVC provider significantly reduced. The Ombudsman found in
her favour and awarded damages. The key determinant was that the Pension
Scheme could provide no evidence that they had monitored the investment
performance of the AVC provider, which the Ombudsman suggested should
be done annually.
- At the meeting
of the Pension Fund Committee on 16 November 2002, the officers were
asked to undertake a more fundamental review of the AVC arrangement
on the grounds that following the events of 2001 [with the demise of
Equitable Life who were Prudential’s biggest competitor in the local
government AVC market], trustees needed to instigate appropriate selection
and governance processes to ensure that AVC arrangements meet the changing
needs of pension scheme members. This task was included in the Fund’s
Business Plan for 2003/04 but because of the pressures of other activity
related to fund investment and administration it has not been possible
to carry out the Committee’s request.
- The fundamental
review is not time-critical as there are no problems with the current
arrangement. There have also been good reasons for delaying the fundamental
review until the volatility in the marketplace subsides. It is worth
noting from the Watson Wyatt survey that, during the year under review,
AMP NPI, Eagle Star, RSA, Skandia Life and Scottish Equitable all closed
their with-profits funds to new business. In addition, a number of providers,
including the Halifax and the Yorkshire Building Society have pulled
out of the AVC business altogether. The Government are also proposing
changes to the tax regime for pensions that may impact on Scheme AVCs.
- It is of some
comfort to know that Prudential are the lead player in the local government
AVC market and had a more stable year than many of its competitors.
In terms of AVC funds under management, Prudential dominate the market
with £2.18 billion of funds under management compared with the next
highest, Standard Life, which has £735 million under management and
the next highest, Norwich Union, which has £177 million under management.
The Watson Wyatt AVC
Survey 2003
- This is the fifteenth
annual survey, which compares performance of all the major AVC providers
as at 1 March 2003. The comparison of Prudential with the median for
all providers is set out in the table below.
|
AVC
Provider
|
% Performance p.a. to 1 March 2003, based on £100 monthly contribution
for With-profits AVC contract
|
|
Prudential
(position
in survey)
Median
for all providers
|
Three
Years
5.7
(3/16)
4.9
|
Five
Years
6.1
(3/16)
5.3
|
Ten
Years
9.0
(4/14)
7.3
|
NB.
The table indicates that Prudential is well above median performance
in all periods. The level of outperformance, compared to the median
return, has also increased when compared with last year’s results.
Levels of Take-Up Among
Scheme Members
- 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 2003, the level of take-up was 8.2% of membership, down on last
year’s figure of 10.2%.
- There are several
reasons for the reduced take-up in 2002/03. There has been a drop in
the number of presentations given by Prudential and therefore we are
more reliant on scheme members taking up an AVC by their own initiative.
The transfer out of the Probation Service scheme members has affected
the overall take-up percentage as their rate was very high (25%) and
there was a marked increase in the cancellation rates, which may possibly
be the result of current stock market conditions and poor annuity rates.
- 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 is
unlikely to have affected take-up.
- There is no indication
that the introduction of Stakeholder Pensions has had any significant
impact on take-up. Stakeholder Pensions have been slow to catch on although
in some cases they have attractions, when compared to an AVC, as they
offer additional choice and portability without increasing management
charges.
Conclusion
- 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 when the provider’s communications with scheme
members and/or employers is inadequate.
- 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 immediate grounds for suggesting that a review of AVC provider
is necessary.
- However, as previously
mentioned, there are grounds for a fundamental review of the arrangements.
The review could also consider the issue of the drop in take-up referred
to above. This review will be included in the Business Plan for 2004/05.
Financial and Staff
Implications
- There are none.
Environmental Implications
and Implications for People Living in Poverty
- There are no implications
arising from this report.
RECOMMENDATIONS
- The Committee
is RECOMMENDED to:
- receive
the report; and
- ask
the officers to include the fundamental review of AVC arrangements
in the Business Plan for 2004/05.
CHRIS
GRAY
Head of Finance
Background
Papers: "AVC Survey Results 2003" – Watson Wyatt
Contact
Officer: Barry Phillips, Tel: 01865 810805
November
2003
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