Govt seeks evidence on further DC consolidation

The government has issued a consultation seeking views on the barriers and opportunities for increased consolidation amongst defined contribution (DC) schemes with between £100m and £5bn in assets.

The call for evidence follows the Department for Work and Pensions’ (DWP) consultation in September 2020 that proposed for schemes with assets below £100m to wind up and consolidate if they did not offer sufficient value to members.

It is also seeking views on the barriers to schemes with less than £100m winding up and consolidating, and what ideas the industry has on how these barriers can be overcome.

In this ‘phase two’ of the government’s plan for greater consolidation, following the previous consultation, it has said that there will be 1,000 non-micro DC schemes in five years at the current rate of consolidation.

However, the DWP warned that this was still too many schemes and it wants to accelerate the pace of consolidation.

“This evidence-gathering exercise is the next step on this journey but further action will follow, starting with schemes up to £5bn,” said Pensions Minister, Guy Opperman.

“It is not my intention to stop at £5bn but given the present size of the UK market, this is the appropriate cut off - for now. I strongly encourage views for this call for evidence to help shape further policy on consolidation in the DC market.”

The call for evidence also asked how the government can incentivise schemes with assets of between £100m and £5bn to consolidate, what the barriers are and how the government, regulators and industry can remove them, and how risks can be mitigated.

It is looking for international examples of good practice, how important consolidation is in driving better member outcomes, and what more the government and industry can do in moving away from focusing on low costs and charges to a ‘broader assessment’ of value for money.

LCP Pensions Research Team senior consultant, Tim Box, commented: “This public announcement of the government’s intended upper limit on the number of DC schemes is an explicit signal, if one was needed, that it means business and that we can expect further initiatives to force consolidation of DC schemes.

“We now have clarity around which DC schemes will be required to publish value for members assessments. It will only apply to schemes with less than £100m of total assets including both DB and DC and only the DC element of the scheme must be assessed.
“This will automatically exempt many hybrid schemes from the new rules, although we agree with the government’s suggestion that larger hybrid schemes with small DC sections might find it useful to voluntarily adopt the new assessment to check value for money for their DC members. 
“Pushing back the implementation date to the end of 2021 does give schemes a few extra months to gather the necessary data. The good news for schemes that will have to deliver these assessments is that the first scheme year it applies is that ending after 31 December 2021. 

“We also welcome the government’s sensible proposal that schemes which would otherwise have been in scope of the new assessment will not be if they have properly notified TPR that they are in the process of winding up – this is sensible in order to avoid additional costs."

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