Are small DC pension schemes in the member interest?

tpr 4

Trustees vote for their own demise

There hasn’t been much comment on social media about the Pension Regulator’s consultation response on the future of trusteeship. This is in marked contrast to what TPR reports as a record 114 written responses submitted during the consultation.

As you would expect, there was agreement that trustees should be doing the right thing by members but on the key questions posed by the consultation , the responses showed little consensus

Responses to the question of whether schemes should have to report on the steps they are taking to increase diversity on their boards  were fairly evenly split between those for and against the idea

It’s hard to imagine any profession that should be less against disclosure and diversity than the Profession of Trustees but those who were against them claimed that too strong a focus on diversity could deter those that had the necessary skills and experience from applying.

There may be an argument that the DB coffin should be carried out by pall-bearers of a certain age and dignity, it’s hard to see how this should apply to DC, where what matters most is the needs and views of savers. Emphatically those view are represented by the diversity of our population and not by Professional Trustees.

My view is that if real change in trusteeship is to happen, it will happen organically through existing initiatives such as NextGen, Young Trustees Network, and Women in Finance Charter and new initiatives we haven’t hear of yet.

Where trustee boards do not embrace change, the schemes they govern will be stigmatised (not least by the Pension Regulator). I actually support tPR’s approach which – counter intuitive as it is – will hasten the consolidation of small schemes that refuse to embrace the diverse needs of their memberships in their governance.

In opposing diversity, many trustees will have signed their trust’s death warrant

TPR’s devious plan

It will surprise many that tPR did not consider the inclusion of professional trustees and in extremis corporate trustees on every trustee board. Small DB schemes have struggled to behave like big DB schemes and unbundle the services they once had from an insurer. They have struggled with the cost and especially the cost of governance. From insurance they came and to insurance they will return (if not the PPF).

DB Trustees are largely pall-bearers, taking their coffins to grim burial but DC schemes are quite different.  The reason tPR has given up on requiring professional trustees to sit on the boards of DC schemes is not because it has given up on professional trustees

We would also expect the number of schemes to be significantly lower given current trends and our desire to see the market (particularly in DC) contract to so that more savers are able to benefit from larger, better-run schemes.

As is seen in the final section of the consultation response, tPR has given up on small DC schemes. It would have been entirely inconsistent with tPR’s push for DC consolidation, to have required the “to be consolidated” to have professional trustees thrust upon them.

The member pays for failure

While it might be argued that the best way to kill small DC is to exhaust it beneath the weight of regulation and governance. But this is forgetting who pays.

While the member will always pay for failure, even where DB is bailed out by a benevolent sponsor, DC sees a direct cost to members.

We should remember that the vast majority (if not all) own occupation DC schemes have sponsors paying above the AE minima. Any extra costs of governance imposed on DC schemes fall to the sponsor and can only be met by reductions in budgets elsewhere. Inevitably the costs will be offset either against wages or pension contributions and most likely the latter.

Barriers to consolidation.

The Pensions Regulator makes it quite clear that for the bulk of small occupational plans, especially DC plans, there is no future. In its summation it talks of its role as “reducing barriers to consolidation”.

But this is not a pulling up of the drawbridge on trust based plans in general. The final section of the paper deals with small schemes wishing to wind up while holding guaranteed benefits for members.  Clearly on wind up such guarantees could be lost and tPR were consulting on whether trustees should assign guarantees to individuals (via a section 32 policy) or that the guarantees were assigned to another trust (which held them for the member).

The policy intent was clear (even if the reason why other trusts would take such guarantees wasn’t). The policy intent was for consolidation to include guarantees and that will present an interesting question for schemes wishing to consolidate.

NEST cannot currently take the assigned guarantees but many master trusts may feel they can. There would have to be a compelling business case for any trustee to take on board guarantees from third parties – unless they were confident they were in no event liable to meet them.

“I have come to bury small DC schemes…”

At least as far as small DC schemes go, it’s clear that tPR are hell bent on getting rid of them (through consolidation into larger schemes).

Prior to the emergence of commercial master trusts, there was no obvious way of incentivising consolidation but all that has changed. Most commercial master trusts are set up to receive the member pots of small DC schemes and most will find this commercially attractive.

It is undoubtedly in the interests of members to move to larger arrangements with proper governance and the prospect of much better value for money.

David Fairs may not have said it explicitly but he might as well..

He has come to bury small DC schemes and for the right reasons. The refusal of tPR not to intervene in requiring schemes to have professional trustees or to properly deal with diversity is based on pragmatism. There is no point on forcing failing schemes to fail faster or to get members to pay for something that will not be sustained.

It is much better for the Pensions Regulator to focus on consolidate failing DC schemes into master trusts (even where there are guarantees).

While I deplored the FCA for being weak on providers running workplace pensions (which are our future) I praise the Pensions Regulator this week for not throwing good governance after bad for small DC schemes (which are our past).

It’s good to see the Pensions Regulator looking to exert less power, it can save its ammunition for the bigger fight. Small DC schemes are not in member’s interests and the big fight is to get rid of the vast majority of the 8,000 rump that do their members far too little good.


tpr 4

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in advice gap, age wage, pensions, trustee and tagged , , , , , , . Bookmark the permalink.

Leave a Reply