Additional Voluntary Contributions: Restoring the value add 

Members can often convert their AVCs into additional years of service or include them in their pension lump sum at retirement, which can significantly boost their monthly guaranteed income. For members, AVCs represent a value add to their retirement savings. Many contribute to their AVCs for decades, accumulating substantial funds.

However, for pension trustees, AVCs can be a source of frustration. While an individual member's AVC pot may be significant to them, the total AVCs usually represent a small portion of the overall pension fund. Consequently, they often receive little attention at trustee meetings, and when they do, it is usually due to issues such as member complaints, underperforming investments, or complications during scheme buy-outs. 

We have compiled a selection of our recent experiences into case studies to show how we can assist you with the challenges you may be encountering.

Consolidating AVC assets can be costly, making it an impractical solution for some clients. In this case, a trustee of a smaller scheme faced numerous complaints from members about significant delays in accessing their AVC funds at retirement. The slow processing times caused frustration to members eager to access their savings, and the trustee was concerned about potential complaints to the Pensions Ombudsman.

We advised the client to communicate transparently with AVC members about the delays, encouraging them to plan for retirement early and consider moving their AVC account if they wanted to avoid potential issues. This proactive communication helped ease frustrations and prepared members for possible delays, reassuring the trustee that they had taken reasonable steps to support their members without incurring disproportionate costs.

A client received a complaint from a member whose AVCs had been invested in a low-return deposit fund for many years. The Pensions Ombudsman ruled in favour of the member, leading to a compensation payment of £140,000 for all affected members. The investigation itself cost £35,000. In response, the trustee requested a comprehensive review of all AVC investments, which revealed several issues, including the discovery of members who had left their AVCs behind after taking their main scheme benefits (known as “orphan members”).

We recommended consolidating all AVCs with one provider and began conducting annual reviews while regularly communicating with AVC members about their investments and options. This case demonstrates that while ongoing governance of AVCs incurs costs, it is far less expensive than fines and compensation payments, and it significantly enhances member experiences.

Scheme buyouts can be complex, but if AVCs are considered at an early stage (i.e. 2 years prior to buy-out), they need not complicate the process. In this instance, a DB scheme had 88 AVC members with assets totalling £1.5 million, spread across six providers. We developed a strategy to facilitate the transfer of assets while managing the complexities of orphan members and multiple AVC providers.

Our actions included:

• Creating a dedicated section of the provider’s master trust for AVC members with DB entitlements, streamlining asset management.
• Transferring 12 orphan AVC members to a separate section of the master trust to manage their assets independently.
• Designating a cash target date fund as the default investment strategy for AVC members, balancing growth and risk as they approached retirement.
• Offering members with with-profit funds an uplift upon relinquishing their guarantees, ensuring fair value for their contributions.
• Scheduling AVC transfers to coincide with the buyout for a seamless transition.
• Opting not to require member consent for assignment, simplifying the process and reducing administrative burdens.

The implementation of this AVC buy-out solution was successful, resulting in a smooth transition and satisfied members.

AVCs are often overlooked in pension scheme management, yet our case studies highlight how proactive management and strategic decision-making can transform AVCs from a source of frustration into a valuable asset that enhances member satisfaction. By addressing AVC-related issues, trustees can mitigate risks and foster a more engaged membership, leading to better outcomes for all stakeholders. If you’re a trustee looking to unlock the full potential of your AVCs, please get in touch with us today to see how we can help you.