Your DC pension scheme may be for the chop- here’s why


Swimming is my new thing and I swim underground in a cave by St Pauls. As I swim along I ponder esoteric things like why the DWP are putting DC schemes with less than £100m in them – in special measures and what this will mean for people’s later life financial affairs.

If you haven’t been reading my blogs, you may not know that the DWP are consulting on a measure that will require occupational DC schemes (including small master trusts) to prove they are worth keeping or fold into larger schemes that can take on their obligations and do a little better for members.

At least that is what the DWP hope will happen and as the consultation is only six weeks long, those who don’t like the plan will have to get their skates on.

I like the plan though I don’t think the DWP have quite sorted how to put it into action (the guidance for small scheme trustees as to how to rate their scheme and compare its “Value for Money” with other schemes looks as over-engineered as the 36 characteristics of a good DC pension scheme and all the other TPR misconceptions of what makes for a good pension.

Of course the DWP has to tip a hat to TPR’s work on DC governance and we are bound to the Ixion wheel of cost and charge disclosure, but it really is time we moved on from the concept of net performance which is a bit of a nonsense. By the time you’ve got your life-styling and your dynamically developing target date funds in scope, you’ve already got a stack of tables that wouldn’t fit into Habitat. Add to this self-select funds and the small scheme trustee is up to his ears in abstract numbers which say very little about value for money and are no good in comparisons because the next scheme along is a “pear” and you remain an “apple”.

Simplicity is difficult, much harder than complexity and the DWP need to simplify what they are doing, if they are going to achieve a simpler pension system. But why do we need a simpler system, why chop these thousands of schemes and why give all the power and money to a few mega schemes? Read on…

Scorched earth

Reading the entire “Improving DC outcomes” consultation is salutary (if exhausting). The DWP seem to have dispensed with the original conception of the charge cap, which would have included the cost of buying and selling assets as part of the cap.

This is not surprising as the Pensions Minister wants DC schemes to diversify into an array of alternative investments including infrastructure, private equity  and the kind of things you invest in if you want your money to matter.

The consultation dispenses with any arguments which might exclude these expensive and often nontransparent asset classes in the search for the long term benefits of patient capital.

But of course you are not going to be able to invest in these things unless you have a seriously big budget for research and have the funds to buy these things thirty bridges at a time. Which means you need to be called Nest or be a big bank with pockets bulging with generosity towards Government pipe-dreams.

Me, I’m happy to see the small pension scheme sacrificed to save us from an army of DC consultants/legal advisers/administrators and communication specialists.

But I don’t buy this “big DC is beautiful” and “beautifully placed” to bounce back Britain through alternative investments clap-trap.  Most of these big DC schemes (Nest being the exception) are run for profit and have to be competitive on charges to gain and retain clients. They are not going to embrace expensive alternatives any more than they are currently embracing proper ESG (which they generally aren’t).This is because a bundled AMC means that the extra cost has to be paid for from shareholder funds (or where there are no shareholders, from some other part of the organisation.

The Government is applying a scorched earth policy to the charge cap and a scorched earth policy to small DC schemes, both are getting in the way of their Lebensraum  for impact investment.

Swimming against the tide

I don’t suppose I am making myself popular with the DWP or the Pensions Minister by saying this, but the way to get patient capital into Britain’s infrastructure is by unlocking the huge amounts invested in gilts by DB schemes and insurers protecting annuities. It is not by sponsoring the bloated private equity industry and the purveyors of infrastructure funds to beat up on hard-pushed DC providers.

So as I swam up and down in my City cellar, I came to the conclusion that what we really need to do is not speculate but investigate just what value is coming out of these small DC occupational schemes and working out which of these big schemes is really delivering the goods.

I know of no definitive research that confirms that member outcomes from big schemes are better than from small schemes and suggest we start by asking how we find a proper measure for value for money. When we know what is really going on at the consumer level, we can work out whether to dispense with small DC schemes and indeed the charge cap.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to Your DC pension scheme may be for the chop- here’s why

  1. Martin T says:

    The Trustees concern, as APL repeatedly point out in the previous blog entry, is to act in the best interests of the beneficiaries. Those interests would include paying the maximum to DC savers and being able to pay the amounts due in full, on time, to DB members. The members views on ESG investing, for example, can be taken into account but the Trustees are not bound to slavishly implement those views as they may not be in the members best financial interests. It is up to the Trustees to decide how to balance all the competing interests, preferences and objectives of the beneficiaries.

    The push from DWP/TPR to invest in infrastructure may not be in the beneficiaries best interests. For example consider a DC fund where all the members are due to retire in 5 years and all have expressed a preference to buy annuities. It would patently be wrong to invest in an illiquid infrastructure project that won’t be paying interim dividends or return capital for 20 years. In that example it is clear cut, in others it would be less so, it is up to the Trustees to decide the balance and should remain so.

    For DWP/TPR to suggest Trustees should plan to balance investment returns and risks, contribution affordability, covenant strength and funding needs so as to be increasingly confident in paying beneficiaries in full and on time is appropriate. How to achieve that aim should be up to the Trustees with their decisions reasonably the subject of TPR challenge. For DWP/TPR to direct investment strategy, however, goes against the fundamentals of trust law and in my humble opinion is wrong, whether the direction be to invest in gilts, infrastructure or anything else.

    Similarly it may not be in members best interests to move from a small DC trust to a large master trust, members’ tax-free cash entitlement may be reduced for example. Again it should be up to the Trustees to decide, with TPR having a right to challenge the decisions. I agree with you Henry that research comparing member outcomes from big schemes with those from small would be welcomed. I think that research should include not just financial return, risks and costs but also the support for saving and retirement planning as all of those elements affect the (hopefully) ‘good outcomes’ that result.

  2. Bryn Davies says:

    I admit that I had to consult the oracle, otherwise known as Wikipedia, about the Ixion Wheel. I get the relentless anaology, but it still poses the question as to whether the DWP is really Zeus, and which party is Hera.

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