Gearing up on the drive to provide better value for members in relation to defined contribution pension schemes

It has been a DeCidedly busy few months for the DWP in the world of defined contribution pension schemes ("DC schemes").

DWP consultation – barriers to greater DC scheme consolidation in the UK

Firstly and following on from its September 2020 consultation "Improving outcomes for members of defined contribution schemes" which identified a slower rate of consolidation of occupational DC schemes than the government would like, a new DWP consultation is asking for views on what the pensions industry sees as the main barriers to greater DC scheme consolidation in the UK.

Guy Opperman, the pensions minister has set out a clear desire for consolidation in the industry to go further and faster to improve member outcomes.

This consultation states that the DWP’s preference is for schemes that fail the new ‘value for money’ test to be wound up, rather than given time to improve — however this is still under consultation.

Whilst some within the pensions industry welcome this consultation and the government's drive to reduce the number of DC schemes in order to improve member's retirement outcomes, others within the industry point out that whilst there are DC schemes that have room for improvement in terms of value for money for their members and member outcomes, there are many schemes which offer great value for members and care needs to be taken not to drive them out of the market.

The Governments' response in relation to improving outcomes for members of DC schemes

Connected to the above, the Government has now published its response in relation to improving outcomes for members of DC schemes. This is its response to two earlier DWP consultations in September 2020 and March 2021 which both related to DC schemes and specifically draft regulations and statutory guidance to deliver better value for money for members of DC schemes and issues relating to incorporating performance fees within the charge cap for DC schemes, respectively.

Alongside this response, it has also issued a call for evidence on “the future of the DC pension market: the case for greater consolidation” in the UK. The government has indicated that the intention behind it is to start “the next conversation on what best value looks like for the millions of pension savers in medium and large schemes that are not in scope of the new [value for money] assessment". It seeks views on how to accelerate the pace of consolidation for schemes under £100 million, but also looks ahead to the “second phase of consolidation for medium to large schemes” (ie schemes with assets between £100 million and £5 billion).

The response confirmed that the government will move forward with new regulations to be introduced in October 2021 which will "challenge some 1,800 smaller DC schemes to demonstrate that they continue to offer value for members and that that value is comparable to larger schemes". Key takeaway points from the response are as follows:-

• They have pushed back the implementation date for the application of the value for member assessment from October, as previously indicated, to instead the end of this year. This means the first value for member assessment will apply for schemes for their first year ending after 31 December 2021.
• Trustees of a DC/hybrid scheme where the total assets (DC and DB together) are below £100 million are in scope. But they will review the £100million threshold at regular intervals to see if the new value for member assessment is achieving the required effect of ensuring members are in schemes that offer tangible value.
• Smaller schemes that would ordinarily have been in scope will be exempt if they have informed TPR at any time before the next chair statement is due that they are in the process of wind up. This notification must be in accordance with existing section 62(4) of the Pensions Act 2004.
• The proposed change to the charge cap regulations to allow schemes to smooth performance fees over five years come into force on 1 October 2021.
• The illustrations for the highest and lowest self-select funds in which members are invested, should be at scheme level; it is not necessary to illustrate them by employer.

New statutory guidance for Money purchase schemes

The Department for Work and Pensions has updated its previous September 2018 guidance for trustees and managers of occupational money purchase pension schemes in relation to "Reporting of costs, charges and other information". That guidance was issued pursuant to the obligations under the 2018 Administration and Disclosure Regulations which introduced requirements relating to the disclosure and publication of the level of charges and transaction costs by the trustees and managers of a relevant scheme.

The updated guidance is effective from 1 October 2021. Amongst other things it requires trustees and scheme managers of certain occupational pension schemes offering money purchase benefits to ensure the following:

• Illustrations identify all default arrangement(s), (regardless of how or when they became default arrangements) and the lowest charging and highest charging self-select fund in which members are invested.
• Illustrations identify the levels of the pension scheme charges and transaction costs incurred by the member on each investment option (figure in pounds, or pounds and pence).
• Illustrations provide an example of the cumulative effect of those charges and costs over a savings lifetime.
• Where the scheme levies a charge of any kind on contributions, an illustration including contributions should be shown for each affected default fund, and if no default funds are affected, at least one illustration including contributions should be shown.
• The effect of charges should be determined by an adjustment inclusive of all the charges, including performance fees, and transaction costs, which will have been taken from a member's pot. Where trustees choose to smooth performance fees over multiple years, the smoothed fees should be used for the purposes of cumulative illustrations.

If you would like to discuss anything raised in this blog, please get in touch with a member of the pensions team, or your usual contact at Brodies.