In a consultation published on Friday (September 11), the government announced draft measures “aimed at improving saver outcomes, and supporting the economy by promoting investment in green technology and infrastructure by pension schemes”.
The document follows an initial consultation published in February 2019, which ramped up the pressure on small schemes to consolidate and to consider long-term illiquid investments.
Small scheme consolidation has long been on the DWP’s agenda. FTAdviser reported in March on pensions minister Guy Opperman's preference for a selection of providers with large multi-billion-pound portfolios that could exercise greater collective bargaining power than an array of small self-administered schemes.
Now, the DWP is proposing measures to encourage consolidation of small schemes, which specifically targets those with assets below £100m, and include a requirement that those pension funds “report on how their scheme presents value for members, taking into account costs and charges, investment returns and various elements of governance and administration”.
Winding up may be the best option
Schemes subject to these reporting requirements that are found not to provide value for members will be made to report this fact in their scheme return.
The aim, according to the consultation document, is to improve governance standards and value for money for scheme members, but the DWP acknowledged that in practice, usually if not in every event, the “best option” for small schemes that fail to meet its high standards will be to wind up.
Exceptions to this general rule may arise in cases “where trustees are realistically confident that required improvements can be made, and/or where the wind-up and exit costs may exceed the costs of making such improvements, and/or where there are valuable guarantees that would be lost on consolidation”, the document stated.
In such eventualities, the scheme may seek to improve. However, the document added: “If the trustees fail in this attempt to improve, they will be expected to wind up the scheme and consolidate the members into a scheme that offers better value.”
Trustees will be required to report and justify their approach to The Pensions Regulator, which has the power to "issue an order to wind up the scheme, to remove trustees in certain circumstances, or to appoint new trustees to properly manage the scheme’s assets”, the consultation stated.
David Fairs, executive director of regulatory policy, analysis and advice at TPR, welcomed the announcement, and noted that the new rules “call on schemes with assets under £100m to carry out a more rigorous annual assessment of their value for members”.
"If those schemes cannot demonstrate they offer good value, they will have to tell us whether they plan to improve or consolidate,” he said.
“This is in line with our aim to cut the number of poorly run schemes in the market, so every saver benefits from being in a pension scheme with excellent standards of governance and which delivers good value.”
Illiquid investments made easier
Other proposals being put to consultation include using transparency standards as a “prompt” for schemes to consider diversifying into illiquid assets, and other measures intended to make that asset class more palatable.
For example, the DWP is proposing to make an amendment to the charge cap regulations to exclude the costs of holding physical assets.
Mr Opperman wrote in his foreword to the consultation: “I am enabling schemes to smooth the calculation of performance fees in a year, which will remove potential barriers to these illiquid investments while ensuring members remain protected.
“I also announce my intention to create a further, multi-year smoothing option for the calculation of performance fees to facilitate access to less liquid assets such as venture capital.”
Stephen Budge, principal in LCP’s DC practice, welcomed the government’s proposals. He said: “It’s also interesting to see the greater clarity and support to hold physical assets outside of the charge cap restrictions, clearly highlighting the intent to allow infrastructure-focused investments.
“The charge cap relaxations and clarities offered are going to help significantly with enhancing investment strategy design.”
Mr Opperman concluded: “I believe the proposals set out will facilitate necessary consolidation within the market and enable trustees to take a long-term approach to providing resilient and sustainable products for savers’ retirement income, as well as the range of investments and strategies they can access to deliver that.
“In this way, members can be confident of achieving better outcomes from their DC pension scheme investments and their engagement in the wider UK economy, and greater benefit to the UK itself.”
The consultation will run until October 30.
Benjamin Mercer is a reporter at FTAdviser's sister publication Pensions Expert
