The Department for Work and Pensions (DWP) recently launched a consultation to understand the barriers to further consolidation of the defined contribution (DC) pension market in the UK. Here is a summary of the key points below.
DC scheme reporting of net investment returns
New net investment returns reporting for DC schemes of all sizes must be stated in the Chair’s statements for scheme years ending after 1 October 2021 and included with the information published on a publically available website.
This anticipated requirement comes into force despite the DWP’s recent statutory review of the Chair’s statement, concluding that it had not been effective in achieving the multiple policy goals of scheme governance and member engagement. We wait to see how the publishing of net investment returns will be received without detailed context of the investment strategies involved.
Encouraging consolidation of DC schemes
The next stage of encouraging consolidation in the DC trust-based market begins for scheme years ending after 31 December 2021. New ‘value for member’ requirements will apply for schemes with total assets below £100m and schemes not providing value relative to larger, potential consolidator schemes must improve or wind up.
The Government will thereafter look at DC schemes with between £100m and £5bn of assets. It published a ‘call for evidence’ on 21 June welcoming views on the barriers and opportunities for consolidation of these larger schemes.
Whilst we agree there are many trust-based schemes that could improve value for members, we also recognise that there are many others that are well-governed and deliver good value.
Consolidation often means moving to a bundled, pre-packaged solution resulting in members picking up the cost for services they sometimes do not use. We believe there should be room for well-governed, tailored trust-based schemes to continue to operate.
DC scheme investments
The ‘charge cap’ regulations will be changed with effect from 1 October 2021 to allow schemes to smooth performance fees over five years, giving trustees the flexibility to include illiquid assets that generate performance fees within their default arrangements.
This is the first step to unlocking this further asset class for pension savers. The industry now needs to develop solutions for accessing illiquid assets within a DC pension environment.