How the government plans to scale up DC schemes

Chancellor Rachel Reeves announced plans to accelerate consolidation among DC schemes during her Mansion House speech last night.

The Department for Work and Pensions subsequently published a consultation on measures to help schemes merge or transfer members in bulk, as part of the first phase of the government’s Pensions Review.

“The government is clear that the future of the workplace DC market lies in fewer, bigger, better run schemes, with the scale and capability to invest in a wide range of asset classes that can deliver better returns for savers long term and invest in the UK, which benefits savers and their communities,” the consultation document stated.

The consultation is seeking industry views on setting a minimum size for multi-employer DC schemes, including master trusts. This is based on government research and other feedback that suggests schemes with £25bn or more in assets can start to realise economies of scale, with more substantial effects felt when they reach £50bn.

In addition, the government is seeking to legislate to allow the bulk transfer of members of contract-based DC schemes, which would make it easier for these schemes to consolidate. This is a key development to enable the Value for Money framework to be implemented.

In her introduction to the consultation, pensions minister Emma Reynolds said: “While the UK pension market has been consolidating, the pace is too slow. I want to do more to facilitate and accelerate consolidation to ensure UK schemes have the scale to compete for investment opportunities with their international counterparts.

“This consultation includes proposals for further reforms, designed to ensure there are fewer, bigger, better run pension schemes with the resources to pursue the investment diversification that can deliver improved returns for hard working savers.”

Achieving scale in DC

The consultation cited research showing that, as well as an increased ability to invest in a wider range of asset classes, larger schemes tend to have greater internal expertise – often reducing costs further.

To increase scale and achieve these benefits, the government has proposed that multi-employer schemes should have a maximum number of default funds and each of these default funds should have a minimum size.

It has asked for industry input as to what these minimums should be, and whether this approach is appropriate, as well as whether there are any adverse effects to be considered.

Matt Calveley, director of DC at Isio, said: “For too long, we’ve seen lower levels of domestic investment compared to our overseas counterparts, so we’re pleased to see the focus on addressing the disparities in investment patterns.

“The review aims to change that by ensuring the anticipated growth in DC fund assets contributes positively to UK growth. It’s a win-win situation – enhancing the financial security of pension savers while supporting the broader economic landscape.”

However, Mark Searle, partner and head of DC investment at XPS Group, argued that “scale is not required to unlock the immediate benefits of investing in private markets for most DC schemes”.

He said those with as little as £30m in assets were able to invest up to 20% of their investment portfolios in illiquid markets.

“We believe that the stimulus needed to drive investment in private markets is a change in mindset from focusing on minimising costs to maximising long-term performance,” he said.

Australian schemes – a key model for the government’s proposals – invested more in illiquid assets because of the proven positive impact on long-term returns, Searle said.

“There isn’t the same dynamic in the UK currently but the introduction of some type of performance-based league tables would help change the mindset,” he added.

Laura Myers, head of DC at LCP, said reducing or limiting the number of default options could be difficult as different schemes serve different kinds of members.

“The government should remain mindful of these complexities to ensure all savers receive the most appropriate investment solutions,” she said.

Myers also voiced concern that “overly burdensome requirements” related to consolidation and reducing default options “could divert valuable governance time away from making the actual transition”.

“Governance resources should be focused on ensuring a smooth and effective shift, not on meeting excessive administrative demands,” she said.

Bulk transfers in contract-based DC

Trust-based DC schemes regulated by the Pensions Regulator are already able to transfer members in bulk to a new arrangement without the need to ask for individual consent.

However, the same does not apply to contract-based DC schemes. This poses a significant barrier to consolidation plans as well as the proposed Value for Money framework, which would require poorly performing schemes of any kind to transfer members to better arrangements.

To fix this, the government plans to legislate to allow such transfers and make it easier to merge schemes or move members in bulk. It has asked for feedback on when such transfers should be allowed and what changes would be needed to the role and responsibilities of independent governance committees.

The consultation also asked for input as to what role employers should have in any transfer process, taking into account the fact that some employers may have ceased to exist or no longer have a relationship with the pension provider.

LCP’s Myers said these proposed changes were “long overdue”, but warned that “robust safeguards need to be in place to protect members’ interests”.

Sonya Fraser, partner at Arc Pensions Law, said: “The proposal to legislate to remove the need for individual member consent to transfer out of a contract-based arrangement would helpfully remove a barrier that currently exists to move members out of such arrangements where appropriate to do so – and would bring trust-based and contract-based schemes onto more of a level playing field.

“This will enable appropriate action to be taken in relation to low performing schemes in conjunction with the upcoming new Value for Money framework.”

James Carter, head of platform product policy at Fidelity International, added: “It is important that firms are able to act decisively and quickly where better outcomes can be achieved by consolidating assets into a different pension scheme.”

Carter emphasised that there was “a great deal of detail to work through to ensure the intended policy is delivered successfully”.

Further reading

Reeves to set out vision for DC ‘megafunds’ (14 November 2024)

What TPR wants from Value for Money consultation (29 August 2024)

Savers support UK investment drive – if it boosts performance (7 August 2024)