On 21 June, the DWP issued its response to its consultation on draft regulations and statutory guidance to deliver better value for money (VfM) for members of DC schemes. It builds on the Government’s ambition to drive better outcomes for members of DC schemes and forms part of its agenda to drive market consolidation of smaller DC schemes. The new regulations will come into force later this year.

Whilst trustees of all DC schemes have a duty to assess costs and charges and comply with the principle of ensuring value for members, the Regulations particularly target schemes with assets of less than £100 million that have been operating for 3 or more years, defined as “specified schemes”. There are some 1,800 smaller DC schemes that fall into this category that will need to carry out and publish a holistic assessment to demonstrate that they continue to offer VfM when compared to the value provided by three larger comparison schemes. The outcome of this assessment must be reported in the annual Chair’s statement and set out reported costs and charges, fund performance and other measures of scheme governance and administration.

What if the trustees’ assessment shows a scheme is not providing good value? In such a case, the trustees should consider whether VfM can be improved rapidly and cost effectively or whether the scheme should be consolidated into a larger scheme or wound-up.

Following the conclusion of the consultation, the DWP has:

  • pushed back the implementation date from 1 October to the end of 2021. Affected schemes will now need to complete and report their first value for members’ assessment within 7 months of their first scheme year ending after 31 December 2021;
  • clarified the position on hybrid schemes to confirm that in determining whether such a scheme has assets under £100 million and is a specified scheme, all assets, DB and DC, should be included. This should helpfully exclude many hybrid schemes from the requirement to complete the additional value for money assessment. Secondly, to confirm that if a hybrid scheme is in scope, the assessment need only be carried out in relation to the DC element of the scheme;
  • in the revised statutory guidance, reminded trustees that tPR can help with identifying comparator schemes as they hold a list of authorised master trusts;
  • amended the obligations relating to the selection of the three comparator schemes - trustees must now ‘have had discussions’ with at least one of the larger schemes over a potential transfer, as opposed to simply having “reasonable grounds” to believe that at least one of the larger schemes would accept a transfer in of the smaller scheme members. This could cause some practical difficulties if market capacity becomes constrained;
  • included an exemption in the Regulations so that specified schemes will be exempt from the requirement to produce the VfM assessment if they have informed tPR, before the next Chair’s statement is due, that they are in the process of winding-up.

The Government confirmed that it is committed to increasing the pace of consolidation in the DC pensions market and will review the £100 million threshold at regular intervals to see if the new value for member assessment is achieving the required effect of ensuring schemes offer value.

The Regulations also require all relevant pension schemes, regardless of asset size, to report on their investment return in the annual Chair’s statement. There has been no corresponding extension of this obligation to 31 December - the information on net investment returns must be stated in the annual chair’s statement for the first scheme year ending after 1 October 2021, and published on a publicly available website.