If you run a scheme that offers mixed benefits (sometimes known as a 'hybrid scheme') you need to manage the defined benefit (DB) elements as if they were a DB scheme and manage the defined contribution (DC) elements as if they were a DC scheme.
Schemes offering mixed benefits can be complex. You need to have an in-depth understanding of the scheme structure and the benefits the scheme offers.
- You need to have an in-depth understanding of the scheme structure so that you can manage potential risks.
- Ensure you have robust systems and processes in place so that you can separately identify and manage the assets attributable to each type of benefit.
- Speak with your advisers if you need help understanding the structure and governance of your scheme, along with the benefits you offer to your members.
Types of mixed benefit scheme
Schemes offering mixed benefits can be complex. They include a combination of DB and DC benefits. Examples of hybrid schemes include:
- separate DB and DC sections under one trust
- DB scheme with a DC underpin, eg a scheme that will pay a member the better of their DB or DC benefit
- DC scheme with a contracted out element on a DB basis
- DB schemes with a DC top-up
Potential risks to members
To manage a scheme offering mixed benefits you need to have an in-depth understanding of the scheme structure and the benefits the scheme offers.
If you do not understand and manage the scheme appropriately, members will face a number of potential risks:
- lack of governance
- unclear and incorrect member communication
- incorrect benefits and funding levels
- inappropriate investment strategies
- failure to offer the correct retirement options for DC members
Checking the status of money purchase benefits
The statutory definition of money purchase benefits changed with effect from 24 July 2014. Your scheme may be affected by this change if it offers benefits that have the potential to develop a funding deficit, ie non-money purchase benefits. You should review the trust deed and rules to check whether your scheme, as a result of the benefits it may offer to members, is affected by the changes. Take legal advice where necessary, especially if there is any doubt over the nature of benefits offered by your scheme.
For more information, see our 'Bridge statement' on changes to the definition of a money purchase benefit.
You can also find detailed guidance from Department for Work and Pensions on money purchase benefits in pensions law: guidance on changes from 2014.
Ensuring robust systems and processes
In general, you must manage the DB elements of your hybrid scheme as if they were a DB scheme and manage the DC elements as if they were a DC scheme. See our sections on managing DB benefits and managing DC benefits.
If you’re unsure what actions are appropriate to your scheme, you should speak with your advisers to gain assurance that you understand the structure and governance of your scheme, along with the benefits you offer to your members.