Trustees have warned that the government’s drive to consolidate defined contribution (DC) pension schemes could lead to “herding” and a focus on reducing employer costs at the expense of member outcomes.
In response to the government’s consultation, ‘Unlocking the UK pensions market for growth’, the Association of Member Nominated Trustees (AMNT) warned that accelerating consolidation of smaller pension schemes could mean that “the interests of the pension saver will be a secondary concern to reducing employer cost and increasing margins”.
Maggie Rodger, co-chair of the AMNT, said the association was aware of the government’s priority of greater pension scheme investment in UK “productive capital”, as well as boosting member outcomes.
However, she warned that the megafunds proposals “do not definitely achieve either purpose”.
“While the Value for Money proposals were concerned with consolidating schemes not providing good value for members, these proposals will see the closure of all smaller schemes, regardless of the value they provide to members.”
Maggie Rodger, AMNT
Rodger added: “It is also disappointing that issues of adequacy and responsible investing are missing from this consultation and their inclusion in phase two of the review has been indefinitely postponed.
“We point out that the long time horizon in multi-employer collective DC investment would be better placed to respond to the government’s priorities.”
The association also suggested that the proposals could undermine the development of the Value for Money framework, which is currently being worked out by the Financial Conduct Authority and the Pensions Regulator.
“While the Value for Money proposals were concerned with consolidating schemes not providing good value… for members, these proposals will see the closure of all smaller schemes, regardless of the value they provide to members,” Rodger said.
“With the recent indefinite postponement of phase two [of the Pensions Review] this is now the only review under way, which means that this alone has to bear the weight as the vehicle for improving member outcomes.
“It is therefore particularly disappointing that issues of adequacy and responsible investing are missed.”
A role for CDC in long-term investment
The AMNT has long supported the introduction of collective defined contribution (CDC) pension schemes. Rodger is also a trustee of the Church of England’s pension scheme, which is actively exploring the CDC model.
She argued that multi-employer CDC schemes – the subject of separate regulatory and policy work – had long time horizons and a lower liquidity requirement, meaning they “would be better placed to respond to the government’s priority” of increasing investment in productive finance.
Savers in traditional DC schemes “must have the option of transferring into a multi-employer CDC scheme”, Rodger continued.
“It is not in savers’ interests to move from a poorly performing scheme to one that will give them a slightly bigger pension when there is the possibility of transferring to one that could give them a substantially larger one,” she said.
The AMNT also voiced concern that the government’s drive for scale – it wants DC master trusts to have at least £25bn in assets under management – could discourage innovation by smaller schemes.
“It is difficult to see how the creation and expansion of CDC – or any other innovative ways to provide better pensions more effectively than the DC and decumulation model – will be able to operate in a market that is discouraging smaller schemes from considering wider options instead of just moving to a mega DC scheme,” Rodger said.
