DWP's consolidation aims welcomed but small schemes' value emphasised

Government proposals that push the defined contribution (DC) market towards consolidation have been broadly well received by the pensions industry, although some pointed out that some smaller schemes provide great value.

The Department for Work and Pensions’ (DWP’s) response to a duo of consultations outlined plans to require trustees of smaller DC schemes to demonstrate their schemes’ value to members or consolidate, as well as the introduction of performance fee 'smoothing' to allow greater investment in illiquids within the 0.75 per cent charge cap.

Barnett Waddingham partner and head of DC, Mark Futcher, said: “Whilst we agree that there are many schemes in the market which do need to improve and create better value for members, we must also recognise that there are many schemes which offer great value to their members.

“Consolidation often means moving to a bundled, pre-packaged solution which usually means the members picking up the full cost for services they sometimes do not use. There must be room for own trust schemes to continue to operate.”

Aegon head of pensions, Kate Smith, commented: “The government strongly believes that fewer larger schemes will improve members’ retirement outcomes. While we agree trustees should consider all investment options, it’s important to strike the correct balance between facilitating such considerations while not distracting trustees from their duty to scheme members and beneficiaries.

“Furthermore, particularly in the larger end of the market, charges are already very competitive, so the focus needs to be redirected to providing value for the member.”

B&CE director of policy, Phil Brown, wanted the government to go further, commenting: “We welcome steps by government to ensure that members of pension schemes are getting a fair deal. We believe that all pension schemes should be subject to tough value for money checks, not just schemes that fall within a certain threshold.”

There was also reaction to the consultation response regarding fee changes, with Hymans Robertson head of DC investment, William Chan, stating that it was “good to see that the DWP is progressing with plans around the assessment of fees for private markets investments”.

However, he added that he was concerned that these changes “do not appear to be in the interest of improving outcomes for members” and that they might “stifle” innovation.

Chan continued: “We are also surprised that the DWP is planning to introduce these changes this year. Some important elements remain opaque and under-developed and there is insufficient time to address this.

“The treatment of ‘look-through’ costs, for example, is still unclear and we believe there will be challenges in implementing smoothing of performance fees in practice, particularly for illiquid investments that have already been implemented.

“The DWP should urgently review its decision to implement changes this year. Instead, it should provide more time to develop the framework for assessing fees for private markets investments with member outcomes at the heart.”

Pensions and Lifetime Savings Association deputy director, policy, Joe Dabrowski, was more positive about the changes, stating that he supported “the government’s intent to facilitate DC schemes’ investment in the widest range of assets, including illiquid assets, private markets and other alternative investments, and maintenance of the charge cap”.

He suggested that the proposed calculation adjustments would “provide clarity for schemes and aid those schemes which wish to add illiquid asset investment into their portfolio”.

However, Dabrowski made it clear that it was important to be realistic about the proposals’ impact, stating: “Many other structural factors are at play, including the cost and transparency of illiquid investments and the competitive and consolidating nature of the DC market so these proposals will only have a minor impact on asset allocation and there is unlikely to be a wholesale switch into illiquid investments.”

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