The regulator’s drive to consolidate the DC sector is making progress. Whether that progress is fast enough for the pensions minister will depend on the decisions made by employers, trustees and pension consultants in the coming years.
December 2021 figures from The Pensions Regulator showed the number of DC schemes standing at 27,700, almost halving since a decade ago when, in 2021, the figure stood at 45,150.
Scheme numbers fell 2 per cent in 2021 but when micro-schemes were removed from the statistics, the fall was much more impressive with the total number of non-micro schemes declining by 12 per cent.
Membership in non-micro schemes increased by 8 per cent over the year, compared to 11 per cent the year before, and by 938 per cent since the beginning of 2012. Schemes with 12 to 99 members fell from 760 to 660 in a year.
Those with 100 to 999 members fell by 420 to 360, while 1,000 to 4,999 member schemes fell by 240 to 210. The number of 5,000 plus schemes was steady at 140 and was the only segment to add members, rising from 20,994,000 to 22,767,000.
XPS Pensions Group research into 80 schemes representing over £25bn assets found that around half of schemes with assets of less than £100m expect to consolidate. The research, carried out at the end of last year, found two thirds of these expect to do so in the next 12 months while one third of schemes with assets of £100m or more expect to consolidate in two to five years’ time.
Some 76 per cent of schemes expect to move to a master trust while 6 per cent would move to an alternative DC trust sponsored by the same employer.
The research also revealed some of the main drivers of change – with the top reason being to improve investment innovation and options available, selected by 19 per cent, with 14 per cent opting for ‘providing members value for money’. Perceived and actual regulation and the desire to improve governance came close behind on 13 per cent each.
Sophia Singleton, head of DC at XPS Pensions Group says: “Looking at market data, growth over the last two years has been spread across the market and we expect that to continue. What we see is that different clients are looking for different things, hence having different solutions in the market is important.”
Steve Leigh, associate partner at Aon says: “We know from our own research that nearly half of larger pension schemes are considering changing their structure, and this excludes those schemes that have already made a change. This means that across all providers there is a lot of activity responding to tenders and pitching to support schemes. While we do expect to see further consolidation in the master trust market as providers look for increased scale, at present there is more likely to be a capacity crunch, especially with regards to supporting the transition of existing assets, which is a high risk and specialised area.”
There is also an emerging secondary market. Also from Aon, Tony Britton, partner and head of UK DC Solutions says: “From a provider perspective, it’s clear that clients have become increasingly discerning, looking for innovation and proof of strong client care – which is broadening the market for a number of providers. In parallel we have clients considering master trust to master trust moves. We are also seeing some plans switching provider to gain extra value, but remaining contract-based. The breadth of market competition here is a little smaller and so may lead to more concentration.”
Leigh says that when it comes to the terms available, there is still good value to be had in a very competitive pension provider market. “The savings in charges available are often starker for smaller schemes, those with less than £100m, where they may not have historically had the scale to negotiate lower charges directly, or for schemes that have not reviewed their provider for some time. There is a clear segmentation based on the target market that providers are aiming to work with, from the more bespoke and sophisticated providers at one end, through to the mass market providers at the other, as well as some attempting to occupy the middle ground to appeal to all shapes and sizes of employers,” he adds.
Michael Ambery, partner at Hymans Robertson says the big providers are winning out. He says: “We are seeing increased demand due to consolidation and direction in the industry. Big providers meaning those that have significant assets under management are winning business and adding to their assets.
“There is also significant activity by master trust providers in achieving their business plans and looking to achieve their targets – with very aggressive/competitive prices to attract asset and member growth.
“We are also seeing disruptors emerge within the market, for example Cushon and Smart, who are using not only pricing, but technology, as differentiators.”
He says that financial wellbeing and broader savings (Isas) and open banking are other key reasons why providers are chosen by members, but also “a concentration based upon brand name and trust for the provider, as well as their commitment to the market – what we term appointment risk”.
Does demand mean providers are being less generous on terms? Ambery thinks not, but adds that terms do depend on the size of client – their asset size, the number of members, average age and inflow of contributions in order to determine terms. He adds: “There are now also flat/ fixed rate providers – People’s Pension, Nest etc. The competition to achieve asset size and growth is still driving prices down for the larger corporates. For smaller and medium-sized corporates and pension arrangements the market may well feel less competitive due to the potential attractiveness in this area. It is very important that a corporate receives the correct advice and positioning in understanding and approaching the market.”
In terms of employers and their advisers’ priorities, Britton adds: “I see employers and their advisers are looking across all proposition aspects when making a decision, wanting to find a provider that is strong across the board. I am seeing a real focus on client care and support as a key area – perhaps due to previous poor client experience and also due to adviser concerns about the ability of some providers to support more new schemes given current and future potential capacity challenges.
“It is also becoming increasingly common for joint working groups made up of existing trustee and employer representatives making decisions as an extra check, to keep a focus on pension members at the heart of the decision making.”
Buck consultants head of DC and Wealth Mark Pemberthy also sees capacity constraints and a need for increased lead times, with the picture also clouded somewhat by volatile markets. He says: “We see no evidence of schemes receiving less generous terms and still see a competitive market for quality schemes, however we are seeing providers be more selective about opportunities that they are prepared to tender for as they concentrate their resources on schemes that more closely fit their target profile.
“We are seeing evidence of lead times increasing as implementation capacity gets stretched, particularly in relation to asset transfers. The current political and economic uncertainty will put additional pressure on this if planned asset transfers get postponed due to market volatility.
“Trustees have been evaluating value for members in their schemes for a number of years and this will often influence the selection process, where they will look to match perceived areas of strength of their scheme and improve areas of perceived weakness. This may result in particular emphasis on areas such as investment or communication where there can be quite a bit of differentiation in provider offerings. Employers will often prioritise communication and operational requirements.”
Singleton says: “What we’re seeing is that high demand is creating a very competitive marketplace, and whilst the selection processes we see look at wider value for money, price is still a key part of that equation.”
She adds that other things employers and advisers are looking for include employee engagement and financial wellbeing tools, at-retirement support that goes beyond wake-up packs and a helpline, good investment solutions with greater focus on ESG and climate change and hands-on employer support.
Leigh suggests that the default investment performance is very important for schemes “particularly where the decisions on investment design have traditionally been made by the employer or the scheme’s own trustee board. It is important for those handing over this responsibility to a provider that their employees’ pension savings are being invested appropriately, with consideration more and more being given to ESG factors in addition to good levels of fund performance”.
He says the other main priority area is what he describes as the overall employee experience. “While schemes are looking to outsource much of the governance and day-to-day running of the pension scheme by consolidating, the administration, communications and tools available to members of the pension remain key and often can be one of the main drivers for making a change. Improving member experience also extends to the options and support available when accessing pension savings into retirement, as more schemes recognise the significant financial risks to members of getting this wrong.”
Ambery believes it is also important to help an employer ensure it is attractive to the market as well.
Ambery adds: “There is an awareness and education piece needed for employers on the provider market to ensure full understanding of their objectives and requirements. It is also essential to ensure that the employer is as attractive to the market as possible in order to achieve its objectives.
“Employers should consider the costs/charges, the investment choice and how that fits the corporate and its employees, the administration requirements, engagement/communication governance and quality requirements alongside appointment risk and commitment. They should also ask how does the transfer fit into the corporate strategy overall on pension delivery for example the buyout of DB benefits, consolidation of pension vehicles, review of pension contributions and the interaction with wellbeing and other savings and care products.”