The Government has published an interim response to the first stage of its pensions review, alongside a consultation paper proposing fundamental changes to the market for workplace defined contribution (DC) schemes. The consultation runs until 16 January, after which the Government will decide what measures to incorporate into the Pension Schemes Bill that is due to be published in the Spring.
The consultation paper repeats the longstanding wish of successive governments, to see “fewer, bigger, better run schemes with the scale and capability to invest in a wide range of asset classes”. Although the Chancellor’s Mansion House speech said that “for too long, pensions capital has not been used to support the development of British start-ups, scale-ups or to meet our infrastructure needs,” the Government is not, at this stage, proposing any measures to ensure that DC investments are more UK-focussed. Instead, the next stage of the review will consider whether “further interventions” may be needed. Whether such interventions might include requirements around asset allocation (as floated in September’s call call for evidence) is not discussed, though the Chancellor was quoted in the Financial Times saying that this would be the “wrong approach”.
The two principal proposals are to set a minimum size threshold for default investments and a maximum number of defaults per provider. Neither of these changes would come into force before 2030 at the earliest, but a process for reporting progress before then could drive earlier consolidation.
A specific size threshold has not yet been proposed. The Pensions Minister’s foreword to the consultation says that benefits from scale start to be realised for schemes at £25bn but that “real benefits from an investment capability and economic growth perspective come into effect when funds reach over £50bn”. This would imply a significant contraction from the current market of around 60 providers (Master Trusts and Group Personal Pensions), even with assets expected to grow; workplace DC schemes are projected to reach around £800bn by 2030. The Government recognises that it might need to offer a “glide path” for new entrants to achieve the threshold and adjustments in the case of market shocks and asks whether other exceptions to these requirements are needed.
Removing the ability of providers to use differential pricing is also being considered. This might be disadvantageous to workforces with larger expected contributions/pot sizes, and to smaller workforces where providers are not willing to take them on standard pricing terms.
To facilitate consolidation, the Government proposes to “legislate to allow contractual overrides and replacement without individual consent for contract-based pensions, with appropriate protections” and says that this would be necessary anyway to allow default consolidation of small pots – a measure already set to be included in the Bill. Transfers without consent are presented mostly as a provider/Independent Governance Committee (IGC)-led response to value for money (VFM) assessments, rather than resulting from an employer’s decision to direct new contributions elsewhere.
The consultation paper discusses giving employers (potentially just those above a certain size) a duty to review their pension provider periodically – for example, this could be every five years and linked to the VFM assessments that will be legislated for in the Bill (with parallel FCA rules for contract-based schemes). Alternatively, employers could be required to name an executive with responsibility for retirement outcomes; the Government hopes that this might lead to regular reviews with a focus on value.
Although the call for evidence published in September raised some fundamental questions about the future of single employer trusts, there is no proposal to force employers to close these down in favour of using external providers – instead, it is expected that parallel VFM requirements will encourage consolidation. The call for evidence also asked about the future role of Master Trusts and Group Personal Pensions, but the response does not seek to force all multi-employer provision into one or other of these structures.
