The government is consulting on extending collective defined contribution to non-associated employers, and on shared metrics for value for money in DC. It is seeking evidence on deferred small pots and has decided to press ahead with disclosures on illiquid assets.

 

The Department for Work and Pensions has issued a swath of consultations and responses around DC schemes. Pensions minister Laura Trott has said the package of measures would help address what the department now consider to be the inequality between DC and defined benefit scheme members. 

 

She said: “There is a pension inequality gap between those who had secure retirements thanks to DB, to much more uncertainty now [sic]. Since 2012, Automatic enrolment has transformed the pensions landscape in the UK for the better, but we know there’s more to be done to ensure a fairer future for savers.” 

 

The value for money framework and other new measures “will improve security and create better returns for savers”, she added. 

 

 

Its long-awaited consultation on multi-employer CDC schemes is now open until 27 March. 

https://www.gov.uk/government/consultations/extending-opportunities-for-collective-defined-contribution-pension-schemes 

 

CDC schemes became a possibility from August last year, but only for single or connected employers such as Royal Mail, but the industry, notably DC master trusts, has for some time been asking for an extension so multi-employer schemes can offer CDC too. 

 

Pensions minister Laura Trott said early expressions of interest from stakeholders suggest that “a reasonable first step in extending CDC provision might be for multi-employer CDC schemes to operate as whole-life schemes, providing accumulation and decumulation on a collective basis in one package”, which the consultation is exploring. 

 

However, the DWP is also seeking views on the role of CDC in decumulation, “particularly the potential for CDC decumulation-only products, including how these might work in practice with appropriate oversight by the Pensions Regulator”.  

 

A call for evidence last summer on ‘Helping savers understand their pension choices’ will also help inform the DWP's thinking, she noted. 

 

In today’s consultation, the DWP is looking at how regulations for single employers may need to be adjusted. Among others, it is proposing that ‘fit and proper’ legislation should apply not only to the scheme funder and strategist, but also to those marketing and promoting the CDC scheme. 

 

“This recognises that such activities are likely to be crucial in relation to the profitability and viability of commercial CDC schemes, which will rely on uptake amongst prospective participating employers,” it states. 

 

Communicating the complex arrangements has been highlighted by industry as a key risk and poor or misleading communication is often blamed for the failure of CDC in the Netherlands, as member expectations were out of step with what schemes delivered. 

 

"Given the new dynamics expected in commercial schemes, it seems reasonable to put in place measures to ensure that the scheme isn’t being misrepresented to prospective employers, for example in promotional material,” the DWP said, clarifying that this would not mean that individual communications would be scrutinised but that a form of standard wording would be agreed as suitable. 

 

The DWP also has qualms about scheme soundness and proposes that valuations are made annually using a central estimate. However, rather than increasing benefits if they can deliver benefits in line with the consumer price index, “it has been proposed that the approach of only applying an increase if there are sufficient assets to fund that increase on accrued benefits every year over the life of the membership, should be subject to a limit, for example CPI + 2% per annum”.  

 

If the assets could afford more than an increase of CPI + 2%, “then a one-off increase would then be provided to remove any excess surplus", it suggests. 

 

As for decumulation-only products, the DWP notes that this is new ground for trust-based schemes, and the rules for contract-based decumulation products and their member protections are not completely replicated in the trust-based world.  

“We need to understand what potential gaps exist and develop adequate member protections, striking an appropriate balance between commercial interests and protecting the interests of members,” the government said. 

 

It is especially interested in who would provide seed funding and how decumulation-only products would achieve scale, as the government does not want members to bear the costs of establishing the scheme beyond paying the administration charges.  

 

 

A consultation on a new value for money framework “will improve transparency, comparability, and competition between defined contribution pension schemes", according to the DWP. It will be a common framework used by TPR and the Financial Conduct Authority  

 

The framework will require pension schemes to disclose key metrics and service standards in the hope of shifting the focus from costs to value, as DC schemes will have to disclose, assess and compare the value they provide. 

 

Under the proposals, DC schemes would have to disclose net investment returns, and two risk-adjusted metrics – maximum drawdown and annualised standard deviation of returns. Both would be reported on a backward-looking basis; however, the DWP and regulators are also asking if there should be a requirement for forward-looking ones and if so, which model should be used. 

 

For trust-based schemes, the proposed rules could mean creating two versions of the chair’s statement, a member facing and a governance document, among others. 

 

 
A call for evidence on deferred small pots, running for eight weeks, has also been launched by the DWP, “to deepen the evidence base around the scale and characteristics of the growth in the number of deferred small pots”.  

 

The proliferation of small DC pots is seen as they could be forgotten about by savers, eroded by fees and are expensive to administer for providers that charge a percentage-based fee. The Pensions Policy Institute predicts there could be 27m small pots in master trusts alone by 2035. Meanwhile, the value of lost pension pots has grown from £19.4bn in 2018 to £26.6bn in 2022, possibly due to a growth in small deferred pension accounts. 

 

It looks at two large-scale automated consolidation solutions, a default consolidator model and pot-follows-member, “whilst recognising the potential impact of other actions, including member exchange, and enabling more member engagement”, to help limit the number of small pots.  

 

Last summer, a report by the Small Pots Cross-Industry Co-ordination Group recommended that multiple default consolidators, pot follows member and member exchange proposals should be taken forward for further cost benefit analysis, and that a combination of these might be needed. The group also found that current administrative processes acted as a barrier, and that data testing and common standards would be required.  

 

Industry claimed last year that there was no appetite in government for creating a single consolidator as this would have to be set up by government and would involve costs.  

   

   

However, the DWP has now said the option should not be discounted: “We believe that this variant of the default consolidator approach requires further consideration, recognising the potential value of the simplicity it could offer. Furthermore, it is unclear whether a private sector solution would effectively address the deferred small pot challenge, as such, a state-backed solution may be required to deal with non-economic pots.” 

 

Pot-follows-member was proposed about nine years ago but shelved by former pensions minister Baroness Altmann in 2015 when the pension freedoms were introduced, while industry and consumer groups had put up resistance to pot-follows-member. 

 

Research carried out for the department by Ipsos Mori included questions on pot consolidation. The findings show that when presented with two options for consolidation – either deferred pots being put into a government-approved service or being consolidated into a new pension with their current employers – “participants were happy with either option if they were reassured about the security of the new pension and process for transferring their funds”. 

 

The research also found that “attitudes to pensions were characterised by detachment, fear, and complacency”. 

 

 

The DWP has on Monday also responded to its consultation on broadening investment opportunities for DC schemes. The department is pressing ahead with new asset disclosure requirements and statements on illiquids, to be included in the statement of investment principles and the chair’s statement. Trott said that subject to parliamentary approval, the regulations will come into force by spring. 

 

The department has now agreed to conduct a review of the new rules within five years of them being in force. It will be required “to report on the extent the policy objectives have been achieved, and if the regulations are still appropriate". 

 

Further disclosure requirements add to the burden on trustees and are not universally welcome, but those to be included in the chair’s statement will already come under review again soon. 

 

The DWP said: “We acknowledge frustration that disclosure requirements are being added to the chair’s statement. Our regulations will come into force before DWP has concluded work to review the effectiveness of the chair’s statement. This review will take account of all existing disclosure requirements, including these measures.” 

 

The department is also updating the initial familiarisation costs to reflect a higher hourly wage and the number of hours for trustees to gain familiarity with the new requirements, but it does not consider legal costs to represent a direct regulatory cost to business under the impact assessment, saying the new rules do not require legal input. 

 

It has however taken on board responses calling for new guidance or an update to existing guidance on SIP reporting for trustees and said it “will consider how this can best be provided in consultation with The Pensions Regulator”. 

 

The Pensions and Lifetime Savings Association has welcomed the reform package. Nigel Peaple, director of policy and advocacy, said the reforms have the potential, over time, to enable savers to benefit from greater efficiency and value from the management of their pensions, including through the consolidation of small pots. 

“Generating greater investment growth is also a vital tenet of savers achieving better outcomes through the DC regime, something which may be made available to even more people, thanks to the proposals on extending the CDC regime, and with greater allocations to certain suitable illiquid assets,” he argued, and said the PLSA wants to work with government and regulators on these initiatives “to develop and implement them in the most effective and appropriate way as part of a wider strategy to improve outcomes for the UK’s retirees”. 
 

Phil Brown, director of policy at People’s Partnership, provider of master trust the People’s Pension, was encouraged by the ambition of the proposed measures on value for money metrics across retail and occupational schemes. 

"To ensure savers can easily compare their provider’s performance, making pension companies prominently display their value for money data on pension dashboards would be the most sensible future approach," he added.

 
What are your thoughts on the DWP’s latest views on DC?