In this article we follow up on some current issues in the defined contribution (DC) sphere.
In its corporate plan for 2022 to 2024, the Pensions Regulator (TPR) reasserted its commitment to defined contribution savers getting the pensions that they are entitled. Over the last 15 months, we’ve seen the same themes running through TPR’s approach and in consultations (and responses and subsequent regulations) from the Department for Work and Pensions (DWP): quality, transparency, value for money, and consolidation where value is not being achieved.
On 30 January 2023, the DWP published several consultation documents addressing these themes.
Opening up DC investment opportunities
The DWP published its response to its earlier October 2022 consultation into the broadening of investment opportunities of DC schemes. The consultation asked for feedback on draft regulations making changes to the information schemes are required to disclose in their statement of invesntment principles (SIP), and to the DC charges cap, together with accompanying draft statutory guidance.
The draft regulations were amended following feedback, and the Occupational Pension Scheme (Administration, Investment, Charges and Governance) and Pensions Dashboards (Amendment) Regulations (Regulations) have been laid before parliament. The Regulations will come into force on 6 April 2023 and the finalised statutory guidance has been published.
Broadly the, the Regulations:
- Exclude specified performance-based fees from the DC charge cap.
- Require schemes to include their policy in relation to investment in illiquid assets in their SIP.
- Require trustees to include in their annual chair’s statement a report on performance based fees and asset allocation.
- Require trustees to make disclosures about performance based fees and asset allocation publicly available (free of charge).
Specified performance based fees will be excluded from the cap when the Regulations come into force on 6 April 2023, and the first performance based fee disclosures must be included in the chair’s statement for the first scheme year ending after that date.
The illiquid asset investment policy will need to be included in SIPs by the earlier of the first date on which the SIP is revised after 1 October 2023 and 1 October 2024.
The first asset allocation report will need to be included in the chair’s statement which relates to the first scheme year ending after 1 October 2023.
Value for money
As part of its long-term focus on value for money (VFM) in occupational DC schemes, the DWP launched its value for money: A framework on matrix standards and disclosures (Framework) consultation.
The Framework is aimed at:
- Sandardising the understanding of value.
- Increasing transparency.
- Removing subjectivity from assessments of value.
The DWP’s view is that doing so will allow meaningful comparisons to be made between different DC pension schemes, and the expectation is that this will drive competition and improve quality. The consultation recognises that a by-product is likely to be that certain providers and certain products that can’t maintain competitiveness or demonstrate sufficient VFM exit the market.
A VFM assessment is expected to result in schemes falling within one of three categories:
- Not VFM but with identified actions to improve in areas that would deliver VFM.
- Not VFM.
Once a scheme has been categorised, it will be required to take specific identified actions related to its assessment. One of those actions might be mandatory consolidation, as the DWP is also considering whether the Framework should place a statutory requirement on trust-based occupational DC schemes to consolidate following repeated ‘underperforming’ assessment results (where consolidation is in the best interests of savers). The DWP has suggested that this statutory consolidation power would be exercisable by TPR.
The consultation also brings the chair’s statement into focus. The Framework is intended to build on existing disclosure requirements, and since trustees are already required to make VFM disclosures in the chair’s statement, there is a risk of duplication. Perhaps more importantly though, the chair’s statement is still under review after an April 2021 post implementation review revealed that some of its policy objectives were not being met. The DWP is therefore not willing to commit to a requirement to publish VFM assessment results under the Framework there. Instead, the DWP has proposed that trustees would be required to publish their VFM assessment results separately, by the end of each October.
Whatever form the final Framework takes is likely to impact on those who run pension schemes in terms of time and cost. The need to report annually means that there will be ongoing costs in addition to any anticipated set up costs.
Small pots call for evidence
The DWP has also launched a call for evidence on deferred small DC pots. The number of deferred small pots has grown significantly following the successful introduction automatic enrolment. Workers across the UK have been automatically placed in DC pension arrangements for the last decade to nudge them into saving for retirement. In some cases, workers are low earners who stay in their jobs for a relatively short period, and when they move to a new job, they leave behind a small DC pot in their previous employer’s auto enrolment scheme.
The problem with small pots is that members can easily lose track of them, they offer very little value for the members who hold them, and the additional costs of administering them creates a risk that the overall value of the scheme for all members, including those with much larger pots, is reduced.
The DWP is looking for an optimal large-scale automated solution to deliver a material reduction in small pots. One solution is the ‘pot follows member’ model, which was first proposed back in 2014 but never made it onto the statute books. It would see a member’s pension pot move from their previous employer’s scheme to their new employer’s scheme automatically when they change jobs.
Whichever model is adopted, it will be supported by the Framework. Where consolidation seeks to provide greater value by reducing small pots, the Framework seeks to provide greater value by ensuring that all DC schemes meet a particular quality standard, so the DWP’s work here is complementary. It is also bolstered by other initiatives to help members take control of their savings, like the introduction of simplified annual benefit statements and pensions dashboards.
Both the Framework consultation and the small pots call for evidence close on 27 March 2023.