We have known for two decades that most employers no longer want to support defined benefit schemes. They see such support as a blank cheque book for the Pensions Regulator who extracts ever higher deficit contributions to meet ever more demanding funding codes.
What we didn’t know, but maybe should have done, was the lack of enthusiasm in corporate boardrooms for paying for the apparatus of the company’s own workplace pension scheme.
According to DWP figures, as of 2020, more than 10 million savers had been automatically enrolled into a workplace pension and there were some 1,560 DC workplace pension schemes. Of these 36 are multi-employer master trusts, around 100 are DC schemes in DB trusts (hybrid schemes) but over 1400 company pensions run exclusively for one employer and as defined contribution schemes.
Of the 1400, around 200 have more than £100m assets under management and around 1200 have less than £100m but are still big enough to merit the DWP’s attention and that attention is severe.
The DWP’s statistics tell them that there has been a slow but steady trend towards small DC company pension schemes consolidating all or part of their staff into larger schemes – mainly master trusts. There are a number of reasons given for this, primarily that Trustees of these schemes see member outcomes approved in larger schemes which tend to have better governance and can afford to access a wider range of assets that can improve member outcomes through better investment returns.
The more sceptical commentators, but the consolidation down to employers not seeing they are getting much value for the money involved in picking up the fixed costs of a company pension, the trustee expenses, the legal, auditing and advisory fees that come as standard as well as discretionary costs for the use of specialist communicators, subsidised administration and even subsidies on fund management and platform costs. Employer see these costs as better born by members in a multi-employer schemes where the employer is responsible for paying contributions and nothing more.
The DWP has now decided, after a consultation that has run since October, that DC company schemes with less than £100m AUM will have to prove not just to their sponsoring employer but to the Pensions Regulator that they are adding value relative to what can be achieved by participating in a master trust or in a group personal pension. Small schemes will have to take a value assessment each year to compare net performance, costs and charges, administrative quality and governance standards with three larger schemes, at least one of which would take the smaller scheme over.
Of course small schemes may be able to prove they are keeping up with their bigger counterparts but the DWPs requirement is that these assessments are annual and many smaller scheme trustees may succumb to consolidation out of attrition, not fancying an annual round of self-justification stretching into the distance.
While consolidation looks like reducing the net available market to corporate IFAs in the medium to long term. Some providers (notably Aviva) have been stoking the fire by promoting the opportunity for financial advisors to complete the quite complex templates necessary to calculate net performance (the primary measure of comparison). To carry out this work, advisors will need detailed knowledge of the scheme, the capacity to collate information from a variety of sources and the ability to manage relationships with trustees, employers and regulators.
While we have known about the DWP’s disdain for the governance of smaller DC schemes, many pension commentators were caught out by the hard-hitting approach from the Pensions Minister to larger company DC schemes. In his forward to a second consultation on consolidation, Guy Opperman.
I want to gather evidence on the barriers and opportunities for greater consolidation of schemes with between £100 million and £5 billion of assets under management. I am keen to hear ideas about how to incentivise consolidation for these schemes.
There are only a handful of DC schemes in the UK with more than £5bn in assets and most are multi-employer, so this suggests that Government now see the end of the company pension scheme as we know it.
The question that most retail advisors should be asking is what this means for their clients and prospective clients. Will the break between the employer and its pension disrupt workplace pensions for good or ill and how will wealthier individuals react to finding themselves in a multi-employer scheme? Will this lead to an exodus to wealth management or will the opposite be the effect? Will workplace pensions become irresistible?
Much will depend on how the master trusts develop and whether they become as compelling to their members as they are to Government and Regulators. So far, their success has been down to member apathy, but as we have seen in Australia, as asset balances creep up, members start paying more attention to their pension and the fight for the affections of the pension rich will continue, well after the company pension!
If DB makes no commercial sense then how are public pension justified? Surely this unquantified liability is what our children inherit.
If CDC is to take off, I think Government needs to move on to facilitate master trust CDC as soon as possible. The natural instinct of employers engaged by the idea of CDC is “where is the CDC master trust (or NEST) we can join?”, it isn’t to start a CDC scheme of their own. If a scheme is DC (whether individual or collective) an employer doesn’t need to be engaged with it beyond the payment of its contribution.