The government has stepped back from proposals to regulate consultants advising employers on pension schemes — stating that it hopes the new Value for Money framework will help drive the market away from purely cost-based decisions.
Publishing the final version of its Pension Investment Review today, the government set out its plans to overhaul the DC workplace pension sector, with the creation of £25bn megafunds that will drive greater investment into the UK domestic economy.
Bulk tranfers
In order to achieve this consolidation and deliver the benefits of scale, the government has confirmed it will shortly introduce legislation to allow a ‘contractural override’ enabling providers to make bulk transfers of assets, moving members from legacy defaults that typically under-perform the market.
The report says this legislation, which will be in the forthcoming Pensions Schemes Bill, “will help address a longstanding issue and allow schemes to consolidate underperforming and legacy arrangements, improving saver outcomes and helping the wider scale objective.”
It adds: “Furthermore, it will help create broad equivalence between trust-based and contract-based schemes.”
The report stresses that consumer protection “will be paramount” and this override will only be permitted when it is in savers’ best interests. It states that this will need to be certified by an independent expert.
Private markets disclosure
The report also sets out plans to force workplace pension schemes to disclose exact asset allocations. This will include their split of UK and overseas assets. The report said that The Pensions Regulator and the Financial Conduct Authority will undertake a joint market-wide data collection exercise, prior to the Value for Money framework coming into force.
The government said it was “essential” it had “reliable granular data on investment patterns across the market.”
Schemes will be required to disclose annually information on asset allocation broken down by asset class and sub-asset class. The first reporting will be available in 2026.
This follows commitments from many providers under the voluntary Mansion House Accord to investment 10 per cent of assets in private markets, of which half will be in the UK. This report gives teeth to this voluntary agreement, with the government announcing ‘reserve powers’ in the Bill, that could see it mandate on this issue.
This has caused widespread concerns among the industry. The report says that these reserve powers will enable the government to set quantitive baseline targets for pension scheme to invest in a broader range of private assets, which would include UK holdings, should this be deemed necessary. However the government added it did not anticipate exercising the power unless it considers that the industry has not delivered on its Mansion House commitments. It added that “the reserve power within the Bill will include provisions and safeguards to protect savers’ interest.”
Main scale defaults
The report also states that when bulk transfers take place they must got into the default which providers the best value, as assessed under the new value for money framework, further details of which were also contained in this report.
Given the fragmentation of the industry, and the number of default funds, strategies and scheme arrangements currently available, the report said it wanted greater clarity on this issue. It says it wants all schemes to have a “main scale default arrangement” that is “uniquely identifiable”. This will be the default that is relevant for value for money assessments, and is likely to be the recipient of bulk transfers.
The government says it will engage further with the industry in refining this definition, including through formal consultation “before fully defining the characterises of this level in secondary legislation”.
Transition pathways
The government has also also made clear that it has listened to concerns from the industry regarding the timetable to reaching scale. Although the interim report suggested all multi-employer DC schemes would need assets of at least £25bn by 2030, the final report offers a ‘transition pathway’ for schemes who are yet to reach this scale.
Provided schemes have at least £10bn in assets by 2030 they will be able to apply to be on the transition pathway and must provide the regulator with a credible plan to have £25bn in AUM by 2035. The government will also introduce a “new entrant” pathway – where providers can seek authorisation where they are offering something significantly different that could benefit savers or employers and have plans to reach scale in the longer term.
The government said it hopes these measures will “maintain innovation and competition in the market”. Figures form Corporate Adviser Master Trust and GPP report show that many of the mid-sized providers in the market, who remain some ways below £25bn AUM have delivered some of the best returns in recent years for savers.
The report also confirmed that new CDC arrangements will not be subject to the new £25bn scale requirements. It said: “Due to their nature and the requirements of authorisation, CDC schemes will naturally have a degree of scale and invest productively, but the government will keep the market under review and consider if we need to take further steps to ensure that is the case.”
Value for Money framework
The report a have further details of the new Value for Money (VfM) framework which will also be in the forthcoming Pensions Schemes Bill. It confirmed the first regulatory assessments are expected to take place in 2028.
The government said: “VFM will for the first time, provide a consistent disclosure regime and make publicly available a range of data and metrics of scheme quality, including investment performance, showing the consistency of returns, over time. It will support decision making based on a wider set of metrics than just cost.”
This framework will be used to support the transfer of savers in underperforming arrangements or schemes and ensure that they benefit from better value and enhanced long-term outcomes.
It will also be a key part of scheme selection, in terms of consultants’ recommendations and the choice by employer and given as the key reason why consultants will not be regulated at present. However the Government said: “This Final Report, and the response to the consultation, do not include proposals to influence employers or advisers through regulation or legislation.
“Given the historic wider concerns raised related to these activities (including on market competition dynamics), the government will continue to liaise with the Financial Conduct Authority and the Competition and Markets Authority to consider any new evidence.”
