01 October 2020

The DWP consulted in February 2019 on investment innovation and future consolidation and has now given its response in the form of another consultation document containing detailed proposals under the heading of 'Improving Outcomes for Members of Defined Contribution (DC) Schemes'. These are intended firstly to allow DC pension schemes to diversify their investment portfolios and secondly to improve the governance of smaller DC schemes, if necessary by consolidation into bigger schemes.

The Pensions Regulator and Guy Opperman, the Minister for Pensions and Financial Inclusion, have made no secret of their desire to push forward the consolidation of smaller DC schemes that are providing poor value to members into larger DC schemes (for example master trusts, which are of course subject to enhanced governance requirements). This latest consultation proposes regulatory changes to take effect from 5 October 2021 that will nudge trustees of smaller DC schemes along this path by getting them to focus on 'value for members'. The government says that if these measures don’t work to drive consolidation 'at sufficient pace' they will make consolidation mandatory.

Value Assessment: Encouraging DC Scheme Consolidation

The DWP proposes that smaller DC schemes (those with less than £100m in total assets) will have to complete a 'value for members' assessment every year. New schemes that have operated for less than three years will be exempt from the assessment. Of particular interest to hybrid or mixed benefits schemes, it appears to be the intention at this stage that the assets threshold applies in respect of total assets not just those used for money purchase benefits.

The assessment will be a 'holistic' look at the scheme, taking in a range of factors including costs/charges, net investment returns, the trustee boards level of knowledge and skills and other administration and governance requirements. These factors are to be assessed relative to three larger schemes (with £100m or more of total assets) of which one would be willing and able to accept the members and the transfer of benefits from the smaller scheme.

Trustees of schemes that fail to demonstrate that they are providing appropriate value for their members would have to take immediate steps to wind up the scheme and transfer the members and their benefits into a larger scheme. Schemes can avoid consolidation in 'exceptional circumstances' if the trustees are 'realistically confident'that they can improve value 'both rapidly and cost effectively', or where the wind-up and exit costs exceed the costs of making the appropriate improvements, or valuable guarantees would be lost.

The chair of the trustees will also have to report to the members on their assessment of value for members in their annual statement; and also report to the Pensions Regulator on their assessment and proposed actions in the scheme return.

Charge Cap Review: Facilitating Investment in Illiquid Assets

The government acknowledges that, whilst there is evidence that diversification is possible without paying performance-related fees, the charge caps applicable to default arrangements in auto-enrolment schemes could make payment of performance-related fees difficult, for example in relation to private equity or venture capital investments. The proposal is therefore to provide an easement for performance-related fees when charges for a partial membership year are being assessed against the pro-rated charge cap and to exclude the costs of holding 'physical assets' (eg property and infrastructure) from the assessment against the charge cap. It is also intended to create a further multi-year smoothing option for the calculation of performance fees for the purpose of assessing them against the charge cap.

The government apparently hopes to increase scheme yields for members by allowing them to benefit from long-term illiquid investment premiums, whilst driving new investment in the economy at large.

The government is still reviewing the scope and operation of the charge cap as it applies to auto-enrolment default funds more generally and says it will report by the end of 2020.

Other Proposed Changes

Although 'with profits' funds fall outside the scope of the charge cap for default arrangements, it is proposed that trustees should have a default statement of investment principles where a 'with profits' fund is a default arrangement.

All schemes with DC benefits other than AVCs, regardless of size, will need to publish the net investment returns for their default and self-selected funds in their chair’s statement each year.

Wholly insured schemes are largely exempt from producing a full statement of investment principles. However, the draft regulations make clear that a statement of investment principles (SIP) is required where DC trustees are investing via unit-linked insurance contracts.

Finally, the consultation closes on 30 October 2020, and the changes are proposed to be brought into force on 5 October 2021.

Further Information

Please do not hesitate to get in touch with Alice Honeywill or your normal contact in the Burges Salmon Pensions team if you would like more information or would like to be kept up to date with the government’s proposals in this area.

If you have an interest in investment opportunities in infrastructure or are interested in this topic generally, you might like to look at our recent Perspectives on Infrastructure research.

Key contact

Alice Honeywill

Alice Honeywill Partner

  • Pensions Services
  • Public Sector Pension Schemes
  • Life and Pensions

Subscribe to news and insight

Burges Salmon careers

We work hard to make sure Burges Salmon is a great place to work.
Find out more