Parliament has published for MPs and those in the upper house a document “Explanatory Notes” that explains the Pension Schemes Bill 2025. You can download it here.
It is interesting to see where the emphasis of the explanation is. There are three big sections that are getting very little attention
- LGPS which is at the front of the Bill but so heavily flagged as to be uncontentious
- Small pot consolidation- an interminable section around small pots (less than £1000) and what master trusts are letting themselves in for (yawn)
- Miscellaneous; PPF to participate in the dashboard and a big fat nothing on Pre 97 indexation (what’s happened since the promise at the PLSA, Torsten). The PPF were supposed to be helping!
We were told that this was going to a DC Bill (the pension one coming later in this parliament) but nothing like that. A massive section on Superfunds (with very much to please anyone by way of progress and a highly contentious section on surplus extraction). This is a Bill that if you consider LGPS, Superfunds and Surplus extraction is overwrought DB.
But DC is what most needs help and it gets it (sort of)
I want to write about DC, not from the consumer’s angle (for them it’s all good news as they actually get a pension from their pot) but from the viewpoint of a workplace pension provider.
Firstly let’s think of life right now if you are not a master trust but a contract based provider thinking of £25bn as a ten year target (£10bn in five years). If you are Royal London you might be able to de-fractionalise your personal pensions into a GPP and make it but it’s going to be a tough call – is it worth it? If you are Hargreaves Lansdown or any of the other SIPP providers that do a bit of workplace pensions on the side? Forget it – you have no chance of getting to scale, better hand over the GPP before you have an awkward conversation with the FCA.
On top of all that you could be closed down if you don’t show up well on VFM assessments.
Single Employer sponsored DC schemes
Now let’s look at the Occupational market. I can see no reason for any employer to want to apply for a Main Scale Default Arrangement. There are just too many things that could catch you out
Firstly you need to get to £10bn by the end of the decade and £25bn five years later. The biggest sole employers not participating in GPPs or Master Trusts are pushing £10bn but £25bn – what kind of business plan does that mean? Most of the big schemes – banks – are busy shedding staff not growing their contributions.
Secondly you have quality issues, VFM is beyond your control if you are an employer, it’s down to your trustees and their advisers to get performance, you tweaking performance by paying the fees (the banks tend to) is nice, but it doesn’t mean VFM the way that Torsten Bell thinks of it.
And of course you have to have the right assets in your MSDA, that means UK private market assets and it’s the Pension Regulator who determines if you are cutting the mustard.
Finally what is the upside of running your own scheme with all those problems when you can give your scheme to a master trust and walk away from all the costs of going it alone?
We are simply not going to see any single employer DC schemes, we may see some CDC arrangements on a sole employer basis but most employers looking at CDC will find it through a master trust (think TPT who may get an exemption from the scale requirement).
There are hybrid DB/DC schemes (think the likes of Centrica) . There might be a complication exemption for them but is that worth pursuing?
Master Trusts?
Finally what Master Trusts will still be around in 10 years? The big insurers who haven’t made it yet (eg everyone but L&G who has) have done a great lobby to get a five year extension so they can bail out their sub-scale Master Trust by linking or transferring in the GPPs. So Aviva, Scottish Widows, Aegon and Fidelity are ok (I guess). But what about the noisy newcomers. It is amazing to think how well Peoples have done when you look at the train crash at Mercer with NOW. Even put Mercer and NOW together and you don’t have much chance of £25bn, the same can be said of Aon, only Lifesight had the client bank to get there.
The noisy newcomers- Smart, Cushon and the ever so brave Lewis have no chance of getting there on their own, unless they buy a lot of legacy insurers’ back books. The sad truth is that unless contributions go up a lot then it’s hard to see organic growth for these guys which means having to win market on the stump, competing for business where employers and consultants have been choosing on price. Not a fun way to carry on.
My feeling is that a lot of own occ, schemes and some master trusts are going to pack it in, The GPP market is only useful if you own a master trust as well. This is an economics game and there are no nice stories about technology to win you through, you either have the business plan or you are out of this game.
Read the parliamentary explanation from the DWP. The Pension Schemes Bill is rather better on DC than DB.
