As we previously reported, Defined Contribution (DC) schemes are very much the focus of attention from the Government and regulators at present. 

There are various ongoing projects at the moment which have DC schemes at the heart of proposals for change.

Firstly, there is the Government’s wide-ranging pensions ecosystem review, Phase 1 of which is looking at various issues in relation to DC pension schemes, including encouraging DC consolidation. 

And then there is the FCA’s ongoing “Value for Money framework” consultation, which in due course it is proposed be rolled out to occupational pension schemes including DC trust-based schemes.

And, of course, The Pensions Regulator’s (TPR) attention has been very much centred on DC schemes, continuing its drive to ensure they are well governed and offer value for money (VFM). Alongside this, TPR has also been vocal about pension scheme trustees (which includes DC scheme trustees) not engaging enough on climate change and ESG requirements. It has issued a call to action for trustees to do more than simply the minimum required in relation to consideration of ESG factors (see our blog commenting on TPR’s report on trustee compliance with ESG duties).

We report below on some of the recent regulatory initiatives relevant to DC schemes.

FCA VFM consultation

As we have previously reported, VFM has been a focus for TPR, the DWP and the FCA for some years now. The three bodies have been working together on developing a VFM framework following the Mansion House reform announcements last year.

It is proposed that the VFM framework eventually be policed by both the FCA and TPR.

The FCA published its consultation on its proposed VFM framework back in August. The consultation closes on 17 October.

The FCA has been very clear that although the consultation relates to rules for FCA- regulated firms operating contract-based pensions, the framework is designed for application across the DC workplace pensions market. And that it will in due course be rolled out to both contract and trust-based occupational pension schemes. 

TPR has been strongly encouraging trust-based occupational pension schemes to engage with the consultation and respond with their views given that they will in due course require to comply with the VFM regime. 

TPR regulatory action in relation to DC schemes

TPR recently issued its quarterly compliance and enforcement bulletin. 

According to the bulletin, TPR used its powers 10 times in relation to Value for Member (VFMe) assessments (see our earlier blog setting out what the “value” requirements are and who they apply to) between January and June 2024, issuing seven penalties, totalling £19,250, and three improvement notices.

Combined with penalties issued between November 2023 and January 2024, when TPR carried out a pilot exercise, total penalties for VFMe breaches have reached £33,750.

Again this demonstrates TPR’s continued push to improve DC standards and VFM for savers.

Indeed, Mel Charles, Interim Executive Director of Regulatory Compliance at TPR, commented: “These penalties show our determination to ensure DC schemes deliver value for savers… Trustees can expect to see more penalties issued as we analyse data from scheme returns.”

Winding up of DC schemes

The same TPR compliance and enforcement bulletin also revealed some startling figures regarding subsequent winding up of DC schemes following TPR intervention. This has continued the trend which we previously reported on.

Nearly a fifth (17 per cent) of DC pension schemes that TPR engaged with as part of its drive on value have opted to wind up after concluding that their schemes do not offer good value, TPR has revealed. This appears to have increased slightly from previous figures quoted by TPR (16%) and suggests that, suggesting that, if the results are reflected across the whole DC landscape, more than 200 schemes would be opting to wind up.

These latest wind up figures follow on from TPR’s pilot initiative (outlined here) last year to check that savers in DC schemes are benefitting from rules requiring trustees to assess whether they deliver value through a detailed VFMe assessment.

DC scheme return notices

And last but most certainly not least…

TPR has started issuing its DC scheme return notices. If schemes need to complete a scheme return this year, TPR will send a scheme return notice between August and December 2024. Schemes must complete the scheme return and submit it to TPR by the due date in their scheme return notice.

Trustees must submit a scheme return for all DC schemes they are responsible for. A DC scheme with between two and 11 members is required to complete a scheme return every three years. A DC scheme with 12 or more members is required to complete a scheme return every year.

Commentary

It is clear that improving VFM in DC Schemes and VFMe is still very much a key focus of Government and the regulators and that material progress is already being made in addressing the perceived VFM and VFMe shortcomings in DC schemes. 

The Government’s pensions review is likely to bring about legislative change to meet the Government’s objectives of DC consolidation and better VFM from DC schemes.

And the VFM framework will be finalised and rolled out in due course which will have its own impact as we reported on previously. 

In the meantime, with TPR intervention and enforcement action only increasing, it also appears likely that the trend of DC schemes winding up is set to continue which will lead to compression of the DC market (particularly when coupled with the drive for DC consolidation). 

Whilst this may well meet some of the Government’s objectives, will fewer schemes mean there is less DC pension scheme provider competition and actually be counter-intuitive to the VFM objectives? Only time will tell.

How we can help you

We advise employers, personal pension providers and trustees of defined contribution and hybrid occupational pension schemes. We can assist you with reviewing your scheme and whether it complies with the VFMe legislative requirements and, if not, possible actions to consider taking account of DWP’s statutory VfMe Guidance. 

We can also help you and your pension scheme comply with TPR’s General Code of Practice (for occupational pension schemes) and regulatory compliance, including consumer duty obligations (for FCA regulated schemes). On the pensions tax front, we can assist you with reviewing and updating pension scheme rules as appropriate for the effect of the Lifetime Allowance abolition.

 In the meantime, if you have any questions about anything covered in this article and what it may mean for your scheme, please do get in touch with Susannah Young, or your usual contact in the Burges Salmon Pensions team.