The Chancellor’s sweeping Mansion House reforms for DC pensions are designed to achieve the government’s ambition of a highly consolidated DC pension market which can invest at scale to boost UK economic growth.
The DWP and HM Treasury are now sifting through responses to its consultation on these far-reaching proposals — which sought feedback on plans to consolidate smaller pension funds into £25-£50bn ‘megafunds’. Options include limiting the number of default investment options and setting a minimum asset threshold for remaining funds, or alternatively limiting the number of master trusts through a proposal to operate the funds at ‘scheme’ level.
The government has made it clear that it does not like the fact that there are around a thousand DC schemes in the UK market and believes that these proposals will remove both complexity and fragmentation. It wants the UK DC market instead to operate like the Australian or Canadian models with a handful of ‘megafunds’ or schemes.
That said, single employer schemes are expressly excluded from the proposals under consultation because the government sees its proposed value for money (VfM) framework changes, which will be introduced in the forthcoming Pension Schemes Bill, as already being able to ensure those schemes achieve value for members.
So how might these latest proposals change the pensions landscape. Let’s start with the obvious observation that the proposed £25bn threshold in a master trust’s default AUM by 2030 is going to be much easier for some providers to achieve than others. As things stand the proposals risk the government favouring those providers with both master trust and contract-based arrangements who can tip their arrangements into their master trust, and the few master trusts who are already at the required scale.
There are some well-regarded providers who operate at scale but who don’t have a master trust, as well as some new entrants to the master trust market who, whilst they are growing at a pace, will still be at a disadvantage compared to their competitors. They will likely be concerned that single employer trustees and employers would be less likely to choose them in any consolidation exercise on the basis that there is a greater chance they might not be around in 2030 because they are too small and/or a potential acquisition target of a larger more established master trust.
I am unsure how consolidating 30 or so regulated and highly competitive master trusts into a handful of mega funds answers the Government’s exam question on resolving fragmentation. I think wider DC consolidation is therefore inevitable, not by 2030 perhaps, but certainly at an accelerated pace if the government doesn’t see enough “voluntary “ consolidation of single employer schemes into megafunds under its VfM reforms, details of which were recently published by the FCA.
Like the proposed VfM reforms, the megatrusts proposals, in my view, carry a risk of reducing competition between providers which could stifle innovation. More fundamentally, however, I believe that consolidation of larger DC arrangements into a handful of master trusts won’t solve the much bigger issue in DC pensions of members not saving enough for retirement.
A DC pot may have benefitted from competitive charges and strong investment growth, but if the member takes their pot as a tax-inefficient single lump sum, this immediately wipes out those gains. It is also a widely held view that the current AE minimum contribution rates will not be enough for most members in retirement in the future, even with strong investment performance and competitive charging. But increases in the near future look less likely, with the news that the government is delaying the second phase of its planned pension review, which was specifically looking at retirement adequacy.
For these reasons, I would prefer to see a shift in focus towards regulatory policy changes which help individuals to navigate how much to save for retirement and support them at and through retirement. Because retirement is personal, it’s very hard under the current legal framework to engage with and support members effectively.
It’s great that the FCA is looking at initiatives like targeted support and has committed to introduce rules enabling this. We need more of this kind of regulatory policy change to help members achieve the retirement they deserve.
