"Fewer, bigger, better run-schemes" - this sums up the Government's thinking behind the great wave of change incoming for DC schemes. 

On 14 November 2024, the Chancellor’s Mansion House speech revealed that very significant changes lay ahead for Defined Contribution pension schemes. The speech was also accompanied by the launch of a DC consultation and the Government's Pension Investment Review Interim Report. 

The driving force behind these proposals is the Government's aim to foster greater consolidation of the DC pensions market and boost UK investment. Key proposals include DC “megafunds”, fewer default arrangements with a minimum level of assets under management, contractual overrides to permit transfers without member consent for contract-based schemes, consolidation and consideration of costs versus value and the role of employers and advisers.

The consultation closes on 16 January 2025 and it is possible that these measures could form part of the 2025 Pension Schemes Bill. 

What are the issues with the current workplace DC pensions scheme landscape?

The interim report sets out the Government's long-term vision for a less-fragmented DC pensions system. Aside from the Local Government Pension Scheme it identifies three pressure points for DC schemes in the workplace market that need to be addressed:

Scale and consolidation: fragmentation among larger schemes and barriers to the transfer of assets to contract or trust- based schemes mean that schemes are not able to consolidate effectively and optimise their scale to invest in a wide range of asset classes which could boost UK growth. 

Cost v Value: in the current market, DC funds have been prioritising minimising costs over providing value, consequently effective governance and investment performance may have been overlooked.   The report acknowledges that a new Value for Money (VfM) framework is due to be incorporated into the Pension Schemes Bill but recognises that employers and advisers will need to be sufficiently incentivised to focus on value rather than cost. The consultation document is seeking further evidence on measures that could seek to address this.

UK Investment: Compared to Australian and Canadian economies, UK pension funds invest far less in the domestic economy. The government believes that DC schemes could have a big role to play in propelling forward productive UK investment. 

What are the proposed changes for DC schemes?

The consultation, “Unlocking the UK pensions market for growth”, proposes the following changes:

DC megafunds and default funds: in order to boost UK investment and retirement savings, the consultation proposes establishing a minimum size for multi-employer DC arrangements used for auto-enrolment. Although there is no conclusive evidence of the optimal size for default fund arrangements in DC schemes, the consultation suggests thresholds could be somewhere between £25 billion to £50 billion (or even higher). It is expected that by increasing their size, schemes will have the resources to invest in a diverse range of asset classes such as infrastructure and private equity. The government also highlights the need to ensure that the structure of schemes are suitable - the consultation seeks feedback on limits to the maximum number of default funds for each workplace DC arrangement with minimum asset under management thresholds. The government recognises that these proposed measures represent significant market changes and that providers will need sufficient time for implementation. As such, it is proposed that providers will have until 2030 to comply. 

Contractual override for contact-based arrangements and GPPs: currently for providers of contract-based DC schemes to transfer members to another scheme, individual member consent must be obtained – it is acknowledged that this requirement is not only cumbersome, but an obstacle to consolidation. In order to address this, the government proposes to remove the need for member consent through the introduction of contractual overrides; this will also help to simplify the transition towards the Multiple Default Consolidator Model for the automatic transfer of small deferred DC pots that the government anticipates introducing in the Pensions Schemes Bill. 

It is expected that member protections will be put in place to police this, with appropriate regulatory FCA oversight which may be incorporated into the Financial Services and Markets Act 2000. It is also envisaged that the FCA may be granted additional powers to govern this. 

Auto-enrolment decision making for employers: the government has noted that the DC market is operating with an excessive focus on costs at the expense of considering a broader range of metrics of scheme quality. The consultation acknowledges that auto-enrolment has so far been a success. However, whilst many employers provide good quality pension arrangements, engagement levels vary which can lead to inconsistencies in investment returns across schemes. The consultation explores introducing a duty for employers to review the overall value, investment returns and quality of the arrangement of the scheme every 5 years. It is expected that the output of this review will go hand in hand with the forthcoming VfM assessment requirements. It might be that, initially at least, any new duties could be reserved for the larger employers.

What does this mean for multi-employer DC schemes?

Clearly, transformative changes are in the pipeline for multiple employer DC arrangements (note that single employer trust-based schemes are out of scope but will be subject to the VfM framework). 

Whilst the industry has broadly welcomed the proposals, there is concern that 2030 is an ambitious target to meet. The consultation closes on 16 January 2025. 

Whilst we do not yet know what direction the response to the consultation will take, it is clear that value and consolidation will be the government’s overarching key focus and it is expected that the upcoming VfM requirements will help to provide the impetus schemes need to start laying the necessary groundwork  (the FCA consultation on VFM framework ran to 17 October 2024 and it is expected the Pension Schemes Bill will set out a VFM legislative regime for trust-based DC schemes). 

Planning ahead will be important - whether you are a trustee or scheme employer, we can assist with what these developments may mean for your particular scheme.  Please contact Susannah Young, Andy Prater or your usual Burges Salmon contact. 

For our take on the significant Mansion House pension reforms, please read our article Mansion House Pensions Reforms: Big is beautiful!, Amy Davies.