The Chancellor’s Mansion House speech setting out plans for a £25bn minimum threshold for multi-employer DC schemes could have an immediate impact on provider, experts have warned.
Last week’s consultation proposing a minimum scheme size is predicted to ignite more transfer activity and presents an immediate challenge to smaller schemes with little prospect of reaching the scale required by the new rules, because of the cloud of uncertainty over their future.
Helyne Slade, DC investment consultant, said: “Providers who aren’t above £25bn are going to have a challenge when there is this uncertainty. And employers with those providers will be asking what does this mean for me.
“It is hard to say there isn’t going to be more transfer activity here.
For multi-employer because of scale, for single employer trusts the VFM. It is going to be a big turning up of the dial.
“The fact that these measures are not to be introduced before 2030 will be a relief for some. The DC sector has a lot of eco-systems and there is a lot to work through – the FCA handbook, legislation, consultation with employees and employers – it is a big exercise.”
The consultation launched last week says new requirements will not come in until 2030 at the earliest, and the level of the threshold is to be determined, although the Chancellor mentioned the £25bn figure in her speech.
Currently only around 9 providers have £25bn of assets, though several more have the potential to approach that level within the next five years, particularly if consolidation is accelerated by the measures published last week, as well as the implementation of the VFM framework.
But there is a wide level of uncertainty as to how a size test can be implemented – whether it is measured at a scheme level or a fund level, and whether associated assets can be included.
NatWest Cushon had £2.7bn of assets under management as at August 2024, yet it is cited in a Treasury press release put out with the Mansion House speech documentation as being early investors in the British Growth Partnership that the Chancellor has set up to accommodate consolidated DC providers, suggesting that the Government expects it to pass its new test. The press release cites NatWest and Aegon, the other early investor in the fund, as having combined assets in excess of £200bn.
It remains to be seen how a cut-off point will be determined. Professional trustee Andrew Cheseldine is looking for clarification of whether the £25bn figure relates to fund size or provider size. Several providers with total assets in excess of £25bn hold them across multiple solutions in a patchwork of overlapping funds. Determining what counts as a collective holding could prove complex.
Royal London director of policy & external affairs Jamie Jenkins says the provider has around £66bn across its governed range, of which £20bn is in workplace schemes. Given it is the size of the scheme that will determine whether it has the scale to invest in the productive assets Reeves wants, this would suggest the provider would pass the test.
“For smaller schemes, it is a case of deciding whether this is an opportunity or threat,” says Jenkins. “Whether they decide they are going to stay on in the market, or look to partner with someone else.”
The consultation shows that the government now clearly understands the fragmented state of the UK DC sector. There are big providers with more than £25bn in assets who hold these across lots of defaults, none of which have particularly big scale. The reforms, including the transfer without member consent easements, will help legacy and other schemes to be consolidated.
Jenkins says: “The focus is what level these measures are set at. The UK has billions sat in old defaults, where it requires individual consent to move away to a new default.
This override of individual consent enables the consolidation we are talking about. If we need to consolidate defaults or even providers, this is a key part of that.
“We are expecting some detail on what the transition looks like – there will be some flexibility. But we will see some more acquisition activity. This is not the first time this has happened. With auto-enrolment we had some speculative schemes set up that went when authorisation came in.”
Independent trustee Andrew Cheseldine has flagged the complexities around belief-based schemes, such as the BCF scheme he chairs, which is run for the Plymouth Brethren.
The consultation asks whether there should be exemptions for particular groups and even suggests there could be exemptions for innovators, although gives no detail of how this could work.