With the government – and the opposition – set on consolidating defined contribution schemes, Pensions Expert explores some of the complicating factors that have yet to be addressed.
There is an emerging cross-party consensus there needs to be greater consolidation of pension schemes – whether it is through pooling in local government, legacy defined benefit schemes or workplace defined contribution (DC) schemes.
Much of the current government’s focus in the DC market has been on consolidating master trusts to make them more efficient or finding a way to consolidate small pots.
In Labour’s financial services review, the party says it will give the Pensions Regulator (TPR) new powers to force consolidation where DC schemes fail to demonstrate value to their members. This echoes current government policy.
Alyshia Harrington-Clark, head of DC, master trusts and lifetime savings at the Pensions and Lifetime Savings Association (PLSA), says: “There appears to be a growing cross-party consensus that creating larger pools of capital through pension consolidation is a route to economic growth as this can increase allocation to a greater proportion of UK-based risk-seeking assets.”
In addition, both political parties believe larger schemes are more efficient to run and have access to greater professional support and are likely to be able to give people a better outcome, she added.
There has already been considerable consolidation in the master trust space after the introduction of the authorisation regime. As Lizzy Holliday, director of public affairs and policy at Now Pensions, explains, this process saw a reduction in the number of master trusts from around 90 to 36.
More than master trusts
If governments are serious about making sure DC schemes provide the best value for members, then they will do more than just focus on consolidating master trusts as this market is highly fragmented.
That fragmentation exists because of the range options available to a company. Legacy schemes also add to the complexity.
A business can either decide to offer its own workplace pension scheme run by trustees or choose an external supplier, perhaps through a group personal pension or outsource it to a master trust.
The PLSA’s Harrington-Clark says: “If governments focus only on value for money and consolidation of small pots within master trusts, they will risk ignoring the issues in the contract-based space and other consolidators.”
Consolidating pension provision among GPPs is tricky, because it is based on contract law rather than trust law.
“A trustee can take decisions on behalf of a scheme member without needing them to re-sign a contract,” says Harrington-Clark. But other scheme types require active consumer agreement to consolidate pots which changes the dynamic entirely, she added.
These issues with contract law could become a big problem if the wider intent of the government is to get everyone saving into one larger pension pot automatically, she said.
Legacy DC
It is not just existing workplace contract-based schemes that need attention – so too do legacy DC schemes. Many of these were set up around the turn of the millennium when there was a wave of DB schemes being closed to future accrual.
Rona Train, partner at Hymans Robertson, says: “At that stage, many companies took the easy option of setting up a group personal pension and have not reviewed the arrangements for decades to see whether it is still fit for purpose.”
What is missing is a requirement for companies to review their pension arrangement on a regular basis once it has been outsourced. “That’s the same for both master trusts and contract-based arrangements,” says Train.
Elsewhere, there are a lot of smaller single employer trust-based schemes still operating. Now Pensions’ Holliday highlights that “there hasn’t been much consolidation in this market”.
Hymans Robertson’s Train adds: “The regulator has made it very clear it expects smaller, single employer, trust-based schemes to consolidate into master trust arrangements.”
When smaller schemes move across to master trusts, they often have not been very well governed and there is a question over whether they will get the best terms for their members when they go into a master trust arrangement.
Train says: “We have called on the regulator to provide more support to these smaller schemes to ensure the members’ interest are protected.”
The government has also attempted to improve value for members of schemes with assets of less than £100m.
Holliday explains: “Government required the trustees of these schemes to compare themselves against three other schemes with an expectation if they were not offering good value to they should consolidate and wind themselves up.”
This appears to be the first big step into consolidation outside of the master trust regime, she says.
Second order issues
When policy makers undertake the next steps of consolidation, they need to keep in mind the purpose of the exercise: improving member outcomes. They also need to think about the second order issues any regulation may create.
Consolidation and the value for money framework might create problems such as herding or lack of innovation. “You could end up creating too small a master trust market,” says Holliday.
She continues: “The government sees the new value for money framework as helping schemes to produce comparable metrics which might address some of the roadblocks in achieving consolidation.”
But it will only achieve a better outlook for members if the metrics are right, and if the complexities and downsides of the framework do not outweigh the additional value available in the system, she adds.
This should not just apply to master trusts or trust-based schemes but also to contract-based schemes, including older legacy arrangements and arrangements where the charge cap does not apply, Holliday concludes.
Further reading
TPR boss outlines consolidation drive (13 March 2024)
Poorly performing schemes face new business bans (4 March 2024)
Are policymakers’ DC plans realistic? (column by Martin Willis, SPP) (8 December 2023)
