Delivering better value and improved outcomes for members must take priority over pursuing investments for UK economic recovery, says Aegon, as it issues a stark warning against the pace of DC scheme consolidation proposed by Government.
Aegon head of pensions Kate Smith says it is ‘far from a given’ that supersizing DC pensions will improve member outcomes or encourage Government’s preferred investment strategies.
She argues the Government should defer encouraging consolidation of schemes with £100m to £5bn until value for money assessments and possible consolidation of smaller schemes is concluded and warns a tsunami of schemes clambering to consolidate risks market damage and member confusion.
The Government’s consultation ‘Future of the defined contribution market: the case for greater consolidation’ closed yesterday. The Pensions Minister has referred to this as Phase 2 of his consolidation agenda, focusing on single employer occupational schemes with funds of between £100m and £5bn. Later this year, Phase 1 will commence with single employer schemes with funds under £100m having to carry out a value for money assessment and on failing, either quickly remedy or wind up and consolidate.
The PLSA echoes Aegon’s position and says consolidation to achieve scale should not be an end in itself.
Smith says: “The Government’s objectives behind the drive for even greater consolidation are to deliver better value for money and improved outcomes for members and to create scale for schemes to pursue particular investment strategies including to support the UK’s economic recovery. While these are not mutually exclusive, we believe member outcomes should always be given priority over influencing investment strategies to avoid conflicts with trustees’ fiduciary duties to members.
“Smaller single employer occupational schemes with funds under £100m will need to carry out value for money assessments starting later this year or next, and many may conclude that there are benefits of consolidating. An increasing number are already being attracted to the vibrant and competitive master trust market. But it’s certainly not a given that encouraging schemes with funds of £100m to £5bn to consolidate into far fewer but supersized schemes will automatically lead to better value for money or improved member outcomes. Instead, this trend could stifle innovation and create a rush to basic vanilla offerings. Furthermore, just because a scheme is larger doesn’t mean the trustees will necessarily decide it’s in the members’ interests to invest in certain types of asset such as illiquids or infrastructure.
“There can be other ways of delivering better value for money and improved outcomes without consolidation but the Government’s focus on driving consolidation could discourage trustees from exploring these. For example, it’s much less disruptive to address concerns over net investment performance by changing investment strategy or fund manager rather than winding up and consolidating. In addition, creating ‘long term asset funds’ open to trustees of schemes of all sizes could be just as effective in attracting greater infrastructure investments, subject to addressing concerns over liquidity when member want to transfer schemes or access benefits from age 55.
“We urge the Government to put any ‘phase two’ consolidation on hold until the results of phase one are clear. With phase one not yet started, even speculating on a second phase is premature and risks unduly influencing trustees’ approach to phase one, and not necessarily in a positive way. Trustees won’t be keen to consolidate into a larger scheme if that in turn could face pressure to consolidate under a later phase.
“Scheme consolidation is a complex exercise and not one to undertake lightly or without professional advice. Trying to accelerate scheme consolidation further will create shortages of such advice and bottlenecks in consolidator schemes’ ability to take on new employers. A tsunami of schemes clambering to consolidate would be highly damaging to the defined contribution market and risks widespread confusion to members if significant changes to their retirement funds are not well planned and communicated.”
Nigel Peaple, director of policy and advocacy, PLSA, says: “It is right to expect schemes to consider consolidation if they are not providing value for money, however, it is essential that this only takes place where there is clear evidence that doing so improves member outcomes. Schemes of all sizes can deliver excellent outcomes for members so consolidation should not be an end in itself.
“The average scale of DC schemes is already increasing as the market matures, due to both automatic enrolment and employers choosing to consolidate their schemes in the best interest of members. Indeed, over the last decade, the number of DC and hybrid non-micro schemes have reduced by two thirds. These consolidations are based on a careful and rounded assessment of the benefits to members of consolidation, rather than one triggered by a question of scale.
“Importantly, given the very high asset thresholds proposed by the Government, there is a danger that forcing consolidation will undermine the employer link to pensions which, until now, has gone hand in hand with higher pension contributions and greater support through the decision-making journey. So far, we have also seen little evidence to support the suggestion that the benefits to members of extensive consolidation would outweigh the costs involved.”