The UK government risks harming member outcomes in a drive for further consolidation in the defined contribution (DC) market and should let developments already under way settle first, according to consultants.
In a call for evidence closing today, the Department for Work and Pensions (DWP) made clear its desire to incentivise consolidation of schemes with between £100m (€117m) and £5bn of assets. It considers that consolidation is happening more slowly than is needed.
Pensions minister Guy Opperman pledged that “further action will follow”, also saying he did not intend “to stop at £5bn”.
From October, DC schemes with up to £100m in assets will be expected to prove that they provide value for money or consider consolidating into larger schemes, usually master trusts.
Consultancy LCP sees the DWP pressing to apply a similar approach to schemes between £100m and £5bn. It has said the government should wait to see the impact of the requirements for schemes below £100m “before ploughing ahead” with the higher threshold.
Lee Hollingworth, partner at Hymans Robertson, said the market was not yet ready for more consolidation.
“Master trust providers are still in the process of acquiring scale post-authorisation making the provider market in this area still relatively immature,” he said.
“We are also seeing that the benefits of consolidation are weighted towards larger employers. Today many large single trust schemes still provide a superior all rounded offer to the consumer.”
Sophia Singleton, head of DC at XPS Pensions Group, said that while the market could manage the challenge of more schemes joining multi-employer schemes, “the process should not be rushed as that will undoubtedly lead to poorer member outcomes”.
“Any drive to consolidation should be about good member outcomes and not as a backdoor way of directing more pension scheme investment into infrastructure”
Laura Myers, head of DC at LCP
One of the concerns raised by industry experts is that pushing single employer trusts to join multi-employer schemes could undermine employer engagement.
Hollingworth said the role of employer engagement in staff pension schemes had grown since the introduction of auto-enrolment, and that surveys had shown that many employees see their employer as a trusted source of financial information – against a backdrop of a generally low level of financial education.
“There’s a risk that with widespread outsourcing through master trusts, employers become less involved in the retirement outcomes of their workforce and this needs to be ensured,” he added.
Reduced employer engagement could mean that the cost of scheme administration would fall on the members, according to Laura Myers, head of DC at LCP.
She said the size of a scheme was a poor proxy for good value, a point echoed by others.
Myers also articulated a concern that a government desire to see large schemes invest in infrastructure may be having too much influence on DWP’s approach.
“Any drive to consolidation should be about good member outcomes and not as a backdoor way of directing more pension scheme investment into infrastructure,” she said. “Ironically we see more investment in these types of assets in the large single trusts than commercial master trusts due to the cost pressures in this market.
“The government needs to put members outcomes at the heart of any reform.”