Back in September, the Government announced draft measures aimed at improving outcomes for DC saver. In short, Trustees of occupational DC Schemes with less than £100 million in assets (with some specific exclusions) will have to comply. New regulations set to come into force from October 2021 will require Trustees to carry out a value for members assessment as part of their Chair’s annual statement.
The assessment will require in-scope schemes to provide commentary on their own (i) costs and charges, (ii) fund returns and (iii) administration and governance. Charges and fund returns will need to be compared with three large-schemes. There should be a reasonable expectation that the comparator schemes would accept a transfer from the small scheme on the fee basis used for the comparison (e.g. schemes with a single fee basis, such as Nest or The People’s Pension would expect to be used).
Trustees who conclude from this assessment that their schemes do not offer value for members compared to larger schemes will be made to report this in their annual scheme return. The result being the need to improve the scheme in a short period of time or wind up the scheme and move members to a scheme offering better value. The Department for Work and Pensions expects Trustees to choose the latter option. Few schemes are expected to be able to make sufficient improvements to pass the value test.
Consolidation by stealth?
Small scheme consolidation has long been a topic of discussion. Pensions Minister Guy Opperman said at the PLSA’s Investment Conference back in March that “Improved scale and improved choice will drive better returns” and spoke of his intention to nudge smaller DC schemes towards consolidation.
These new requirements will certainly be an additional burden on single-employer trust-based DC schemes. Even where schemes can demonstrate value for members, this additional reporting will require adviser input and as such, will serve only to increase the scheme running costs and as a result will accelerate consolidation. Whilst schemes that do wind up will have the choice of transferring to a master trust or a group personal pension, the expectation is that most of the assets will flow in the direction of the master trust market.
Act now or lose out
Even though these requirements will only come into effect for scheme years ending after October 2022, we are already hearing about expected capacity issues. Capacity issues both with the adviser market, which will see an influx of requests to support provider evaluations and transitions, but also in the provider market itself. Anticipation of these changes in 2021 and early in 2022 will create a providers market and pricing will be adjusted to reflect that. If you are considering the move from single-employer trust DC scheme to master trust, you should consider bringing your plans forward to position yourself to benefit from current terms before terms reflect the providers’ market.
Plan, plan, plan
Choosing to wind up a single-employer trust DC scheme is time consuming and can bring with it some challenges. It is imperative that the transition is well planned and executed. If you want to be able to move quickly before the surge of smaller DC schemes, here are just a few examples of things to consider and plan for if necessary:
- The requirement for pensions consultation for the change of pension scheme vehicle for future contributions. Although you might think consultation is not required because you are not changing the contribution rate, are all the features, charges and investment options of the new scheme equivalent? Legal advice should be sought.
- Do you have any members with certain HMRC protections, for example protected pension age or cash? With the right planning these issues can be managed but be sure to understand the issue and build time to consider it in your planning.
- Some master trusts require an ongoing sponsor to be in place to accept a bulk transfer of assets. If there is risk of employer insolvency, which may be the case given the current economic climate, this might be something to you need to be take account of when selecting a future master trust.
- Be clear with your chosen receiving scheme how asset transfers will be managed so that you can communicate with your members any investment embargo period or other impacts of the transition.
The early bird catches the worm
We welcome these proposals and agree that it can only be a good thing for members to benefit from value for money and improved governance. We are certainly seeing much innovation in member technology and investment strategy as master trust scale grows. The impressive speed and quality of master trust communications with members throughout the COVID-19 pandemic can only cement the industry view that they are the dominant DC vehicle of the future.
However, heed the capacity warning. Master trusts are a commercial offering and are wise to the expected increase in demand. Plan ahead and start your discussions early if you are considering transferring to a master trust and want to be ahead of the small-scheme crowd.
Go Pensions has carried out extensive research across the master trust market and are in regular discussions with all providers. If you would like to discuss how to select the right master trust, what providers meet your criteria and how you might plan for a migration to master trust, Tina would be pleased to discuss this with you. Call Tina on 020 8213 5890.