Chapter 3 - selecting an arrangement

Question 1

What is the short service refund limit?

Answer 1

Contract based schemes - cannot offer short service refunds, although there is a cooling off period if a member changes their mind.
Trust based schemes - 30 days from 1 Oct 2015. Was previously 2 years.
Employer conts are retained in the scheme, and can be used to pay scheme expenses.

Question 2

Admin burden of trust based vs contract based schemes

Answer 2

Trust based - higher admin burden. Scheme needs to be designed, established, and administered on an ongoing basis. Significant regulatory burden. Need advisor support. Responsibilities can be delegated.
Contract based - off the shelf product. Limited set up work. Admin carried out by provider, not employer. Need to deduct and pay conts, and provide employee info.

Question 3

Risk of trust based vs contract based schemes

Answer 3

Trust based - perceived as higher risk due to admin burden and legal requirements. Employer branded, therefore dissatisfaction = negative reputational impact. Personal liability for the Trustees if not properly administered.
Contract based - limited burden. Admin failure and poor investment performance associated with provider not employer. Provider generally liable.

Question 4

Retirement options of a trust based vs contract based scheme

Answer 4

Trust based - unlikely to offer full range of retirement options unless it is very large. Unlikely to be cost effective. Member will have to transfer to obtain full range of options.
Contract based - far more likely to provide full range of retirement options given economies of scale.

Question 5

Employer preference of trust based vs contract based scheme

Answer 5

Employer is very involved in a trust based, so will make decision based on experience of running a trust based scheme. May prefer to continue with a structure that it and employees are familiar with. Reassurance to employees.

Question 6

Employee perceptions of trust based vs contract based schemes

Answer 6

Trust based - perceived as part of employers operations, under close supervision. Fiduciary nature of duties reassures that the scheme is well managed.
Contract based - operated by insurance companies for purpose of profit making. Best interests not central to the scheme

Question 7

Tax relief for low earners

Answer 7

Contract based - relief at source method.
Trust based - net pay basis.
Two methods usually give the same ultimate result, but a difference for low earners whose earnings are below the tax-free allowance. With relief at source, provider can claim tax relief even where no tax has been paid.
Previously a theoretical anomaly, now more common as threshold has increased and is higher than AE trigger.