Exclusive: DC schemes valued well below £5bn can still provide value – SPP

The government should note that defined contribution (DC) pension schemes "significantly below the £5bn mark" are still capable of providing value for money, the Society of Pension Professionals (SPP) has advised.

In a consultation response shared exclusively with Pensions Age, the company stated that efforts to champion consolidation of DC pension schemes must have the primary purpose of improving member outcomes and argued that obstacles to DC consolidation must be removed if schemes are to be amalgamated quickly and successfully.

The company was responding to a call for evidence from The Department for Work and Pensions, which was launched in June and seeks industry views on the barriers and opportunities for increased consolidation amongst DC schemes with between £100m and £5bn in assets.

SPP DC Committee chair, Tim Box, commented: “There should be discussion about whether £5bn is the correct threshold. The larger a single employer trust is, the less likely it is that consolidation will improve member outcomes.

“The government must be crystal clear that its primary purpose in seeking consolidation of medium-large DC schemes is to improve member outcomes and that other considerations such as reducing the regulatory oversight burden on the regulator or seeking to unlock DC pension assets to invest in UK infrastructure to ‘build back better’ come secondary to this.”

Box also emphasised the importance of running costs as an issue, noting that “virtually all” single employer trusts are structured so that the employer pays for administration costs and advice to the scheme and that the need for this advice had “rapidly increased in recent years due to an increasing DC regulatory burden”.

This compared with other types of pension vehicles, which SPP said were more likely to directly charge pension savers and reduce the size of their pension pots, although the company noted that “it is unlikely that sponsoring employers would willingly pass on any savings from reduced pension scheme costs following consolidation to their employees by increasing contributions for them”.

In emphasising these issues, SPP appeared to show the importance of consideration of the wide range of issues that could factor into a pension scheme providing its members with value for money.

Box argued that transition costs for consolidation exercises were “a material consideration and ultimately impact on pension pots”, adding that the government needed to “consider ways to reduce or mitigate these costs”.

He concluded: “Consolidation could happen more rapidly if there were not so many blocks and complications in pensions and tax legislation, mainly caused by legacy issues.

"If the government does want schemes to consolidate rapidly then it should look to simplify and remove these obstacles.”

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