The Department for Work and Pensions (DWP) has published a paper detailing its policy principles in relation to the scale and consolidation measures for multi-employer defined contribution (DC) schemes, which form part of the Pension Schemes Bill (PSB).

It noted that the paper provided an overview of the government’s direction of travel ahead of a full consultation on regulations, and that it did not replace formal consultation or anticipate the final regulatory framework.

The PSB is set to introduce a requirement for multi-employer DC schemes to operate a ‘main scale default arrangement’ (MSDA) that holds at least £25bn of assets from 2030 to qualify to receive auto-enrolment (AE) contributions.

The MSDA is a default investment proposition for members who have not made an active investment choice.

Schemes that are operated by the same provider, and use a common investment strategy and meet certain conditions, will be able to hold a combined MSDA, while unconnected schemes will need to meet the scale requirement individually.

The government will consult on which assets can count towards the MSDA threshold, and regulations will outline the adjustments and exclusions relevant to the calculation.

This was the primary route to transition to the new scale requirements, but the paper also outlined two additional routes for schemes.

The first additional route was the transition pathway, which aimed to give existing smaller schemes more time to reach the full scale requirement, while the second was the new entrant pathway, which allowed schemes to enter the market and grow to scale while offering a “genuinely innovative proposition”.

“These pathways aim to balance the need for a strong, consolidated market with the benefits of innovation, competition and orderly transition,” the DWP stated.

The transition pathway is a temporary, time-limited route that allows eligible schemes to continue receiving AE contributions while progressing towards full scale compliance.

It is aimed at those that cannot reach £25bn by 2030 but are on course to do so by 2035.

Eligible schemes will need to hold at least £10bn in their MSDA by 2030, be able to demonstrate a ‘credible plan’ to meet the full scale requirements by the end of the transition period, and meet further conditions that will be set out in regulations, which are likely to include governance and investment capability criteria.

To take the transition pathway, schemes will need to apply to the appropriate regulator prior to the scale measures coming into force, and the pathway will operate for five years once approved.

The Pensions Regulator (TPR) has published a statement outlining how schemes can demonstrate a credible growth plan.

Meanwhile, the new entrant pathway will require schemes to demonstrate ‘innovative product design’, aiming to ensure that new entrants make a “distinct and truly new contribution to the market”, rather than replicating existing offerings.

To qualify for new entrant pathway relief approval, schemes must have no existing members; demonstrate ‘strong potential growth' that is sufficient to meet the scale requirement; offer an innovative product design that provides a materially different offering compared to existing market participants; and meet further conditions set out in regulations, which are expected to include evidence of a credible plan to meet scale and to develop investment capability.

“Government recognises the strong call from industry to see further detail on scale in secondary legislation, as soon as practicable, following Royal Assent, and in line with our published Pensions Roadmap,” the DWP stated.

“DWP and regulators will continue to work closely with industry, including through formal consultation to support delivery of these reforms.”

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