Stand Alone Super

Stand-alone company superannuation, both defined benefit (pension) and defined contribution (accumulation) schemes, may appear to have had their day.

However, there are historical reasons why employers have established stand-alone superannuation schemes in the past, and continue to offer them to employees today.   There are also circumstances where it is still appropriate for an employer to provide employees with superannuation benefits using a stand-alone superannuation scheme.

Defined benefit schemes

The terms "Defined Benefit" and "Pension Schemes" are interchangeable.

For those employers who wish to provide a defined benefit arrangement, a stand-alone scheme is the only practicable option.   Defined benefit schemes are often designed, but are not constrained, to pay the retirement benefit as a lifetime pension.   This is not an easy option under a master trust arrangement - in practice an annuity may have to be purchased and currently only one New Zealand insurance company writes annuity business.

Collective investment vehicles such as master trusts are designed to provide accumulation style (defined contribution) or lump sum benefits.   Conversely, it is not practicable to set up a defined benefit arrangement through a master trust.

Despite the decline in the number of defined benefit schemes, there are employers who are still committed to providing their employees with guaranteed retirement benefits in defined benefit form.

Scheme surplus issues

Over the last 15 years or so, partly because of the open-ended nature of the employer funding liability, there has been a trend away from providing defined benefit arrangements in favour of defined contribution schemes.

However during the 1990's, many defined benefit schemes built up significant actuarial surpluses from which employer contributions were being met.   Many of these schemes also had a large number of pensioners.   This presented problems for employers who wished to change their scheme and provide defined contribution benefits in the future.   The problems included:

  • How the employer could continue to use the surplus to meet future contributions, and;
  • How the employer would treat pensioners, as buying annuities is very expensive.

The solution adopted by many employers was to convert their scheme to a hybrid scheme.

Hybrid schemes

In a typical hybrid scheme, there are two distinct benefit sections (defined benefit and defined contribution).   At inception, existing members often had the choice of remaining in the defined benefit section or transferring to the defined contribution section.   New members are required to join the defined contribution section.   Pensions continued to be paid from the scheme and the actuarial surplus built up was made available to meet employer contributions, mitigating some of the employer funding liability.

Hybrid schemes cannot be accommodated under a master trust arrangement.

Defined contribution scheme

As mentioned above, in earlier years there was a movement by employers towards the defined contribution (or accumulation) style of stand-alone schemes, with each having its own trust deed, administration and investment managers.

For some employers with sufficient employee numbers, a stand-alone defined contribution scheme may well continue to present a cost effective solution to workplace savings.   However, most would now suggest that with the increasing costs associated with compliance, administration and trusteeship, stand-alone schemes are loosing their appeal.

Branding, flexibility and control

There are several advantages in operating a stand-alone superannuation scheme.   In particular:

  • Employers aspire to be seen by labour markets as ‘employers of choice'. Some employers see both the benefit design and the branding of their staff superannuation scheme as supporting this goal. While most master trusts allow a significant degree of employer branding, it is much easier for an employer who operates a stand-alone scheme to have total ownership of their scheme brand and direct it in the desired manner;
  • There are certain aspects of a master trust over which the employer has no control, such as in the appointment of an administration or an investment manager. In a stand-alone scheme, the trustee usually has more choice. For example, the trustee can appoint another administration manager if the incumbent manager does not perform. Such choices have little impact on individual members, who would continue in the scheme unaffected;
  • The ability for the employer to appoint an alternative administration manager is not available under a master trust arrangement; only the trustee of the master trust can do this. If the situation were sufficiently serious, then the only option open to the employer would be to terminate the existing master trust arrangements and appoint a new master trust provider. Existing members would typically then be transferred to the new master trust. Alternatively existing members may have the option of receiving their benefit in cash. The transfer process would be quite time consuming, expensive, and may be disruptive to members.

Of course, these advantages do not come without additional cost.

KiwiSaver - implications for Stand-Alone Schemes

The commencement of KiwiSaver has introduced some significant issues for the sponsors and trustees of stand-alone superannuation schemes.   In considering what might be possible, the range of options available to a stand-alone scheme appears to be:-

  • Do nothing;
  • Add a "Complying Fund" section to the stand-alone scheme;
  • Add a KiwiSaver section to the stand-alone scheme;
  • Facilitate diversion of member and employer contributions to a KiwiSaver scheme;
  • Transfer the stand-alone scheme to a ‘complying' master trust;
  • Wind-up the stand-alone scheme.

The options list above may not be exhaustive.   Each option should be exhaustively explored to determine the best outcome for an employer on an individual case-by-case basis.

Summary

Establishing and operating a stand-alone superannuation scheme is generally more expensive than using a master trust.   In addition, most master trusts provide a very wide range of benefit, contribution and investment options and it would be almost impossible for a stand-alone scheme to offer the same level of options (particularly investment options) as most master trusts.

It is for this reason that only the larger employers would generally consider setting up and maintaining a stand-alone superannuation arrangement.