The Government is launching a drive to accelerate consolidation in the defined contribution (DC) pensions sector.
On 7th September 2020, it launched a new consultation on proposed measures to improve outcomes. At the same time, it published its response to the February 2019 consultation Investment Innovation and Future Consolidation, which considered how to encourage DC pension schemes to invest more in illiquid assets, as well as promoting consolidation of smaller DC schemes.
Draft revised statutory guidance on costs and charges and new guidance on completing the annual value for members assessment and reporting investment returns is also included, to obtain industry feedback on how clear this guidance is.
The consultation closes on 30th October 2020.
The Government has stated that it will monitor this situation and, if new requirements don’t drive consolidation quickly enough, it will develop legislation to mandate consolidation.
Proposals to improve outcomes
The main outcome of the consultation response is to require trustees of smaller DC schemes (those with assets of less than £100m) to assess their value for members against three comparator schemes, each of which either has more than £100m in assets or is a personal pension that is not a SIPP.
One of the comparator schemes must be prepared to accept a transfer of the scheme members if the trustees’ scheme were to be wound up. Where the trustees’ scheme is found to provide poor value, trustees are encouraged to consider winding up and move to a larger scheme or authorised master trust.
This new requirement would apply from 5th October 2021 (with exact timing aligned to the scheme year for trustees’ report and accounts purposes). It would apply to trustees of all DC schemes with assets of less than £100m that have been operating for more than three years.
The assessment will be based on three areas:
When a scheme is not delivering good value for members, the Government expects the trustees to wind it up and consolidate with a larger scheme.
If the trustees are reasonably confident that improvements can be made, or there are other factors such as wind-up costs exceeding the costs of making such improvements, the scheme may seek to improve its position. If appropriate changes don’t improve value for members, the trustees will be expected to wind the scheme up and move members to one that offers better value.
The proposal is that the value for members assessment will be done annually for applicable schemes, to be reported on as part of the DC Chair’s statement.
The trustees must also report the outcome of the assessment to The Pensions Regulator via the next annual scheme return, including what action they will take or have already taken if the scheme does not provide good value for members.
The Regulator has powers to wind up or appoint trustees to properly manage the scheme if necessary.
In addition to this new assessment, trustees of all DC schemes will need to report on net investment returns for both default and self-selected funds in the annual Chair’s statement.
The Government has asked further questions on the specific proposals, wanting to know whether the proposed regulation amendments achieve the policy aims set out above.
Illiquid assets reporting
The consultation also asks a series of questions about investment charges and illiquid assets. The Government is keen for pension schemes to consider the benefits of diversifying into illiquid investments such as venture capital and green technologies. While there was general positivity toward the proposals, support was relatively soft, so the Government has decided not to move ahead with the requirement for larger DC schemes to report their policies on illiquid assets in the Statement of Investment Principles.
The Government found no evidence of a lack of understanding of these types of asset class and hopes that the development of scale will enable more schemes to take advantage of them. It will continue to explore this area with stakeholders to improve outcomes for scheme members.
Changes to the default fund charge cap
Changes have been proposed to the default charge cap to accommodate performance fees, facilitating investment in illiquid assets. These proposed changes are in line with the Government’s policy to encourage the use of illiquid assets in DC pension schemes and would come into effect on 5th October 2021.
Other proposals
Default funds that offer a promised level of benefits (usually older with-profits policies) are exempt from the charge cap for default funds. However, existing regulations have the unintended consequence of these funds not requiring a default Statement of Investment Principles (SIP). The consultation proposes that they produce such a SIP. Additionally, there are some schemes that do not report on charges and transaction costs in those closed funds that are no longer able to receive contribution but that hold assets. Under the proposals, schemes will be required to show this information.
Capita comment
The Pensions Minister has been very clear in recent statements that he is looking for serious consolidation of the DC pensions sector towards large schemes with better governance and the proposals represent a step change in that direction.
There is a year until the intended rollout of new assessments on value for members for a large number of DC schemes. All DC schemes will also need to report on the net investment returns from their fund options. Trustees of such schemes should start considering how this may affect their thinking and plans. It will be appropriate to look at what action they may need to take to include this information in the Chair’s statement, especially where a value for members comparison assessment is needed.
Please speak to your usual Capita contact if you would like to know more.