It “makes sense” for closed defined contribution schemes to be consolidated, The Pensions Regulator (TPR) has suggested.
Speaking at the recent Pensions Age Autumn Conference, TPR head of policy Fiona Frobisher explained that as part of its ‘clearer, quicker, tougher’ stance, the regulator is not willing to accept varying DC governance standards.
“We are not willing to accept that it is very difficult for people to meet some standards and that somehow it is ok for some members to be in schemes that are not governed well while other members will be in better governed schemes,” Frobisher said.
“We want all members to be in better governed schemes. So there is a question about what do you do, where [those managing the DC schemes] cannot reach the required standards because maybe they do not have the resources, they do not have the skills or they don’t have the will, there could be all kind of reasons for it. So us just taking action back against them is not going to achieve the desired outcome, and for those schemes I think probably the right thing for them to do is consolidate.”
Consolidation may also result in improved value for money for the member, as ensuring good governance for each individual scheme can be expensive where they are typically small in size, she added.
Frobisher highlighted that it was legacy schemes, closed DC schemes that are often orphaned, where it recommended consolidation.
“It’s not something we expect for everybody or all sectors,” she explained. “Master trusts already have scale. We expect there may be some consolidation in this market, but it is not something that we are concentrating on. There are also other schemes used for auto-enrolment, where some employers already have a decent DC scheme and decided to use it for auto-enrolment. If it is being run well there is no particular need to consolidate.”
The regulator is concerned that small relevant schemes, such as SSASs and EPPs, only “do the very basics” Frobisher said, along with the opportunity for scam risk, “but beyond that there is not a lot of governance requirements expected from them”.
Instead, the biggest area for consolidation within DC is with legacy schemes. These, Frobisher, explained, are mainly defined by “not being anything else” – not master trusts, not being used for auto-enrolment and not being small relevant schemes.
“There are all kinds of reasons why they’re legacy schemes; they’re closed DC schemes, there’s quite a lot that have become orphaned over time. For those schemes it may make much more sense to consolidate into one place,” Frobisher stated.