Improving outcomes for members of DC schemes – Sackers’ response to consultation
The DWP is consulting on changes to regulations and statutory guidance which are intended to improve DC pension scheme governance, promote the diversification of investment portfolios and signal the Government’s commitment to transparent disclosure to scheme members.
In particular, in order to “encourage consolidation”, the DWP proposes to require trustees of most DC / hybrid schemes with less than £100 million in DC assets (“Smaller Schemes”) to undertake a “more holistic” annual value assessment and report on it in their chair’s statement and scheme return. Unless improvements can be made rapidly and cost-effectively, the Government will expect those schemes which do not demonstrate value for members to be wound up and consolidated.
In this response
We welcome the opportunity to respond to this consultation. As well as answering the questions which are most pertinent to our practice and client base, we have provided some general comments on the consultation and on the drafting of the proposed regulations.
Responses to specific consultation questions
Q1. We would welcome your views on the reporting of net returns – how many past years of net returns figures should be taken into consideration and reported on to give an effective indication of past fund performance?
We agree that an assessment of the net returns of a scheme’s funds should comprise part of trustees’ governance. However, we are concerned that the publication of such information could alarm members if the information is not positive. In terms of a pensions’ investment, five years is a short period and it is important that the returns are seen in context, ie are the funds performing poorly or is the poor performance a short-term blip? While investment performance information is available to members (albeit not net returns) and, ideally, they will be engaging with it in their fund choices, evidence indicates this is not the case for most. It would be counter-productive if the publication of such information, without sufficient explanation prompted members to disengage or, worse, to disinvest.
More generally, we note that increasing the length of the chair’s statement is not particularly member-friendly and runs against the trend to simplify and shorten publications.
Q2. Do you think that the amending regulations achieve the policy aims of encouraging Smaller Schemes to consolidate into larger schemes when they do not present optimal value for members?
First, we must note, as lawyers, that the regulations do not refer to a scheme being “optimal” value. The assessment focuses on the extent to which a scheme provides “good value for members” and this is quite different. It would be possible for a member to be better off in another scheme, while receiving good value in the one they are in.
We consider that the regulations will achieve the policy aim of encouraging consolidation. It is likely that, for the most part, schemes will compare themselves against master trusts. Their data will be the most readily available and only such schemes will be able and willing to receive a transfer-in from the Smaller Scheme. Many Smaller Schemes will not compare favourably in terms of value against a master trust. For those that potentially do, we are concerned that the trustees will be unwilling to make the bold statement that they are of sufficient value to continue when it is very clear from the guidance that this is intended to be a high bar.
It may also be that the introduction of this new requirement accelerates the move to consolidate, simply because of the governance costs in undertaking such an assessment. Many schemes may wish to avoid having to undertake the new value assessment; as the time and cost involved may not be justified when the potential end result would be that they should wind-up and consolidate.
We would welcome clarification of the position where a scheme has entered wind-up. Currently, a standard chair’s statement is required where the wind-up will not be completed before the statutory deadline. While this makes sense from a general governance perspective, we do not consider that it would make sense for a Smaller Scheme, already in wind-up, to complete the “holistic” assessment. This will be an issue not only on introduction of the regulations but going forward.
However, while the aim of encouraging consolidation is achieved, actual consolidation may be a challenge for some schemes to complete. This is for two main reasons; there is no requirement for a master trust to agree to accept a transfer-in (and some Smaller Schemes with poor data and records, for example, may be an unattractive proposition to take on board at low cost, so the members may be charged higher costs than those from larger and better run schemes) and there are still technical barriers to schemes winding up. As noted in the consultation, valuable guarantees and protections (such as lifetime allowance protections and protected minimum retirement ages) can be lost on consolidation because existing provisions within the Finance Act 2004 have not kept pace with marketplace changes. Such guarantees / protections may therefore tip the balance and result in a scheme continuing in operation, at least for those members who would be adversely impacted by a transfer without member consent.
We recognise that a solution or solutions to the small pots issue runs in parallel to this consultation. The proposals may address our concerns as to the ability to transfer certain small pots and / or to maintain guarantees and protections. At least in the interim, we would suggest that the legislation needs to permit trustees who conclude they should wind-up to manage their members’ benefits in the manner they consider most appropriate. This may not result in a bulk transfer out to a master trust.
Further, there is a potential policy risk if there is too much consolidation within the market. The Office of Fair Trading’s 2013 report kicked off the wider DC governance changes that have since been put into place. One of the drivers to this report was the fear of a weak “buyer” side on DC scheme operations. However, if the master trust market were to end up being dominated by a smaller number of commercially powerful schemes, there is a risk that we will come full circle on this, with buyers having little choice or option of who to go to for pension provision.
Q3. Do you believe that the statutory guidance increases clarity about the minimum expectations on assessing and reporting on value for members for specified schemes? Are there any areas where further clarity might be required?
We found the draft guidance fairly comprehensive but would appreciate more detail in the following areas:
- Finding appropriate comparators – we attempted a general online search for costs and charges information and found that it is not readily available unless you know the names of the schemes you are looking for. It would be helpful for the guidance to include information on how to locate comparator schemes as Smaller Schemes which do not have regular professional advisers may not know where to start. For example, TPR’s list of authorised master trusts could provide a starting point.
- Undertaking the value assessment where the employer subsidises charges – at paragraph 48, you note that this should be taken into consideration but not how you envisage this being done. In addition, where comparisons are being made, it may not be obvious from the published information that an employer subsidy exists. This could well skew the analysis.
- What action is expected for the trustees to have “reasonable grounds” to believe that one of the comparator schemes would be prepared to accept a transfer of members. In particular, does the DWP expect the trustees to incur any costs by entering into opening negotiations with a master trust? Without such negotiations, it may well not be possible for the trustees to assess whether a bulk transfer is a possibility in practice.
Q10. Do you believe that the updated statutory guidance increases clarity about the minimum expectations on both the production and publication of costs and charges information? Are there any areas where further clarity might be required?
The additions to the guidance are very helpful.
Q12. We are proposing that, for relevant schemes, charges and transaction costs should be disclosed for any fund which members are (or were) able to select and in which assets relating to members are invested during the scheme year.
- Do you agree with this policy?
- Do you agree that the legislation achieves the policy?
Q13. Do you agree with this proposed change? Do you have any other comments on this topic?
Yes. It is not appropriate for wholly-insured schemes to be required to report on their arrangements with any asset manager. Given that such schemes are exempt from the need to produce most sections of the SIP, as the trustees typically have no discretion as to how the insurance company invests the scheme’s funds, we would suggest they also be exempted from the requirement to produce an implementation statement.
We have previously raised concerns with the DWP and TPR regarding the fact that the chair’s statement requirement must be complied with regardless of the length of time during which a scheme has money purchase benefits. This is problematic where, for example, a hybrid scheme transfers their DC benefits out to a master trust but allows members to transfer back their DC benefits (for a very limited period) in order to facilitate the payment of a pension commencement lump sum (i e using those DC benefits as originally intended). On the current drafting, such schemes would also become subject to the new “holistic” assessment. This would not be appropriate and may result in them ceasing to allow this practice. This would disadvantage members and could even discourage some trustees from choosing to consolidate their DC benefits into master trusts.
Arranging an exemption from the chair’s statement requirements in “transfer back” circumstances would avoid trustees having to spend time and costs on preparing a document which ticks the boxes from a regulatory perspective but adds no value to members’ understanding or the governance of the scheme.
We would be happy to enter into further discussions with you on this issue if that would be helpful.
As noted above, some schemes will be concerned at the significant increase in their governance requirements and might wish to wind up before the regulations come into force. The proposed timing does not give them very much time to give the matter proper consideration and / or to take action. Further, it would be beneficial if the new requirement was introduced at a time when schemes are able to avail themselves of the new solution(s) for managing small pots.
While the intention is clear, we are concerned that the current drafting of new regulation 25(1A)(a) of the OPS (Scheme Administration) Regulations does not effectively introduce the requirement for assessment against comparator schemes. We would suggest simplifying the section to read, for example, “(i)…- (aa) each of which is an occupational pension scheme which on the relevant date held assets equal to or greater than £100 million and, (bb) at least one of which the trustees have reasonable grounds to believe would be prepared to accept a transfer of members of the specified scheme if the specified scheme is wound up”.
With regards to the comparator schemes:
- we are unsure why specified schemes would be allowed to compare themselves against personal pension schemes. Such schemes would not be able to accept bulk transfers of members and it is not clear to us why they would provide a meaningful comparison
- as currently drafted, specified schemes may compare themselves against any occupational pension scheme. We presume the intention is for this to be limited to money purchase schemes. While this would almost certainly happen in practice, we would welcome it being made clear in the regulations.
We consider that the new reporting requirement in section 3(2)(a) should be restricted to money purchase schemes.
The amendment made by section 3(2)(b) does not reference the Administration Regulations. This reference is needed for the cross-reference to be clear.