Why carry out a Defined Contribution (DC) Health check?

When things go wrong in DC, they are difficult and costly to fix. Errors in lifestyle rebalances,  Target Retirement Ages, or salary definitions can all affect member accounts and require complex rectification. Pensions governance expert Chris Hay shares some guidance to mitigate risk. 

LawDeb's pensions governance business has seen a number of historic issues with DC schemes we are appointed to. These lead to lengthy, resource-heavy correction projects. These problems are usually found by accident – in benefit statement reviews or data checks – meaning rectification is unplanned, disruptive, and delays other strategic priorities. Some examples of what we’ve seen include:

• Cashflow rebalancing was not set up on a blended equity fund and remained undiscovered for over 5 years, affecting tens of thousands of members taking over 2 years to rectify.
• Target Retirement Dates recorded incorrectly, resulting in the misapplication of lifestyling for thousands of members, resulting in a major rectification project at huge cost to the employer.
• System errors in lifestyle application not being noticed over a number of years, resulting in incorrect member accounts for thousands of members.
• Use of an incorrect unit conversion methodology when moving platforms, requiring the unpicking of an investment strategy change on a member-by-member basis.

Why carry out a DC heath check?

The changes to the Value for Members framework announced by the Government means that transitioning to a Master Trust will be on the agenda for many DC arrangements over the next few years.  A DC Health Check will give trustees and sponsors some certainty that they can proceed with transition projects, or other similar strategic change projects, with confidence.

One of the most common times data errors will be discovered is during the implementation of strategic projects, whether that is an investment strategy change, a move of administrator or a transition to a different product type (such as a Master Trust).  Having to deal with a DC rectification in the middle of such a project will likely derail the entire exercise and push back your Scheme’s strategic plans by months, if not years. It could also have serious cost implications and will erode member confidence. 

What will a DC Health Check do?

DC health checks can be historical or real time. Real time health checks are carried out before or during a large project to ensure the methodology and framework being employed are robust. A DC Health Check will be conducted in three phases.