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As the government’s consultation on consolidation and value for DC members comes to a close, we assess what this means for DC schemes. We urge trustees and employers to act now, rather than waiting for the legislation to come into force in 2021 and 2022.
The government’s latest defined contribution (DC) consultation goes a step further in looking for better governance, innovation in investments and driving further consolidation of UK pension schemes. While not all smaller schemes are poorly run, The Pensions Regulator (TPR) believes that many would benefit from the more professional governance and economies of scale available to larger schemes, as well as access to innovative and diversified investment strategies. This is something the government clearly wants to encourage.
The UK market has a long tail of smaller DC schemes with fewer resources, often paying higher costs and charges, and lacking the scale to effectively access and govern more complex investment strategies like green infrastructure and other illiquid assets. With achieving a Net Zero economy by 2050 already part of UK law, and measures to embed climate change into pension law coming down the track, trustees and employers should be thinking about how they will get the best outcomes for members of their schemes in this rapidly changing environment.
". . . trustees and employers should be thinking about how they will get the best outcomes for members of their schemes in this rapidly changing environment."
As master trusts grow and can further leverage economies of scale, it will become increasingly difficult for trustees of own trust schemes to demonstrate good value for their members when compared to the alternative options in the market – master trusts will be the main comparator.
With their greater scale, master trusts can generally offer lower charges for administration and governance, (albeit some employers meet part or all of these costs in some own trust schemes). And with greater resources, master trusts should be able to better manage exposure to climate change risks and be in a better position to take advantage of investment opportunities that emerge during the transition to a low carbon economy.
Take action now - don’t wait for regulations to take effect
However, not all master trusts are getting ahead with grasping these changes. Some maintain low-cost passive investment strategies that may not look too different from a smaller scheme. We think master trusts need to be looking ahead to regulatory requirements coming in 2021 and 2022; they need to understand and assess how their scheme is contributing to climate change, how exposed it is to climate risks, and make decisions based on these considerations. They will need to calculate the ‘carbon footprint’ of their pension scheme.
As the DC market consolidates, employers and trustees will be looking for good quality master trusts to which to transfer members, and those with strong ESG credentials and credible plans for managing the transition to a low carbon economy will be in high demand.
". . . [master trusts] with strong ESG credentials and credible plans for managing the transition to a low carbon economy will be in high demand."
So trustees and employers shouldn’t wait for the regulations to take effect (for scheme years starting after 5 October 2021) before they take action; we believe there will be provider and advisory capacity issues down the line as trustees seek out the best destination for their members’ DC benefits, and employers look for the best option for ongoing DC contributions. The lead-in time for reviewing existing arrangements and consolidating to a larger scheme can often take 6-12 months, so the time to act is now.
So what is changing?
The proposal is that smaller DC and hybrid schemes with total assets of less than £100m will need to undertake more prescriptive annual Value for Member assessments, compare these against peers, and be transparent about the outcomes. All relevant schemes will need to report on net investment returns within Chair’s Statements and online disclosures, as well as reporting the total value of assets to The Pensions Regulator in the annual scheme return.
Smaller schemes that can’t demonstrate good value need to either rapidly (and cost effectively) improve or wind up and transfer members into a larger scheme that can provide better outcomes.
The proposed annual Value of Members assessment will cover:
- costs and charges – assessed on a relative basis against three comparator schemes
- net investment returns – assessed on a relative basis against three comparator schemes
- administration and governance – assessed on an absolute basis, including the below:
prompt and accurate financial transactions
appropriate default investment strategy
quality of investment governance
quality of record keeping
quality of communication with members
level of trustee knowledge, understanding and skills to run the scheme effectively
effective management of conflicts of interest
The assessment is included in the Chair’s Statement and so is transparent for members of the scheme. There may be reputational and member engagement issues for trustees (and sponsoring employers) reporting that their schemes do not provide value for members.
What we can do to help
- We can help you to understand the new requirements and when they will take effect.
- We can help you make improvements, where required, to ensure your scheme provides good outcomes for members.
- We are independent – we do not run our own master trust, so are not conflicted in reviewing the entire market to identify the best solutions for you in terms of quality of services and member-borne charges, if you need to transfer scheme assets elsewhere.
- We are experienced in own trust scheme transitions – in the nuances that can arise, negotiations with providers, member engagement strategy and successful project delivery.
- We can help you identify which of the master trusts or DC providers are ahead in offering more innovative investment strategies.
- We work collaboratively with both trustees and employers, using our provider research to help you find the right solution.
- We can help you review any existing master trust or contract-based scheme you use for suitability to receive benefits from your own trust scheme.
- We’ll help you put in place a governance oversight framework to monitor that your DC arrangements (in whatever vehicle) remain competitive and suitable.
If you would like more information about how we can help you, please contact firstname.lastname@example.org.
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