The Government’s consultation Improving Outcomes for Members of Defined Contribution Pension Schemes* closes today. It is consulting on radical rules which will require all defined contribution trust based schemes with funds under £100m, which it refers to as ‘smaller schemes’, to carry out an annual value for money assessment against 3 comparison schemes. Those schemes which fail this test will be expected to consolidate into a larger pension scheme such as a master trust, other than in exceptional circumstances where the trustees have confidence they can implement a recovery plan.
The Government believes fewer, bigger schemes will improve member outcomes through competitive costs and charges, high quality governance and administration standards, plus competitive investment returns (net of charges) from a broader range of assets. The Government also hopes increasing the size of pension schemes will mean more have the scale needed to invest in certain asset classes such as illiquid investments and infrastructure which could be important for the recovery of the UK economy.
Aegon agrees scale and consolidation can benefit members, but it is concerned that the proposed approach risks placing too great a burden of proof on too many schemes with a risk that using pension scheme investments to support the UK economy could detract from trustees’ primary objective to deliver improved member outcomes.
Steven Cameron, Pensions Director at Aegon said: “When it comes to defined contribution trust-based pensions, the Government clearly believes ‘big is beautiful’ and the writing is on the wall for many whose funds fall short of a new £100m trigger level. Any scheme which fails a yearly value for money assessment will need to immediately start the process of consolidating into a larger scheme unless in exceptional cases they are confident they can make sufficient and rapid improvements.
“There are thousands of very small DC schemes, many with under 100 members and a previous consultation gained support for any scheme with funds under £10m which failed a value for money test being required to consolidate. Consolidating into a larger pension scheme such as a master trust can often improve member outcomes through a combination of strong governance, quality administration, competitive charges, effective communication and engagement strategies alongside diverse and appropriate investment strategies. But the controversial decision to raise the trigger level from £10m to £100m will bring a number of medium sized schemes into scope.
“Any DC schemes with funds up to £100m will in future have to put considerable effort into an annual value for money assessment. Net investment returns and costs and charges will have to compare favourably with the average of 3 larger ‘comparison’ schemes, ideally avoiding ‘apples and pears’ comparisons resulting from different membership demographics. Trustees will also have to demonstrate their governance and administration are up to today’s standards, which may prove challenging for many smaller schemes. Most trustees will need expert help in the assessment from employee benefit consultants, increasing costs for them or the sponsoring employer, so it’s important to weigh up costs against likely benefits to members. We believe three yearly rather than annual reviews would be more proportionate
“It’s positive to see the Government recognise the important role pension scheme investments play in supporting the UK economy. This consultation removes barriers to allow the largest pension schemes to invest in illiquid investments and while this is a worthwhile aim, it mustn’t take priority over the trustees’ key duty to protect member interests.”
* https://www.gov.uk/government/consultations/improving-outcomes-for-members-of-defined-contribution-pension-schemes
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