UK government consults on consolidation and value for DC pension schemes

The consultation is a response to previous proposals on changes to the regulatory regime for DC schemes, which suggested new investment governance and reporting requirements for large schemes, and requiring smaller schemes to regularly consider value and consolidation.

In the new consultation the government is proposing a package of value-related measures aimed at schemes with assets of less than £100 million. The earlier consultation talked in terms of small schemes being those with assets under £10m.

Pensions law expert Tom Barton of Pinsent Masons, the law firm behind Out-Law, said this was a significant development. If introduced, the new proposals would mean a much larger population of DC schemes and scheme sections will need to consider value and consolidation, Barton said.

The consultation includes new guidance on value for members across three areas: net returns; costs and charges; and administration and governance.

Barton said the guidance provided more structure around the existing “what you get for what you pay” assessment of value and for larger schemes, having regard to this guidance would be good practice rather than mandatory. 

“This is helpful because many larger schemes have devised sophisticated value assessment methodologies,” said Barton. 

“For schemes with assets of less than £100m, many will take the new governance requirements in their stride.  However, for those less certain of their position on value, the more prescriptive nature of the assessment and associated reporting requirements may result in some discomfort. There’s no doubt about it, some schemes will find the additional governance burden too much – resulting in a move to master trust or finding scale some other way,” Barton said.

The government is proposing to introduce more flexibility around performance fees and greater clarity for schemes invested in ‘physical assets’ and investment trusts. It is also reviewing the level of the annual charge cap, currently limited to 0.75% of a savers’ fund, as well as the permitted combination charging structures and the treatment of transaction costs.

“The proposals for investment costs and charges are broadly as expected. However, even with this increased flexibility and clarity, advice will still be needed on the extent to which the charge cap applies to different kinds of investments and at different layers of investments,” Barton said.

If the proposals are introduced they would come into force on 5 October 2021. The consultation closes on 30 October 2020.