Increasing regulation 'will push smaller pension schemes towards consolidation'

Pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, said the findings of TPR’s annual survey of defined contribution (DC) schemes explained the growing trend for employer-run pension schemes transferring their DC assets to master trusts.

TPR said many smaller schemes were failing to demonstrate they provide good value for members. Its annual DC survey (35 page / 1,334KB PDF) found that the trustees of just one in 10 small schemes, and one in three medium schemes, were doing everything which the regulator said was essential to assess value for members. This includes trustees having good knowledge and understanding of the costs and charges paid by members, and carrying out an annual assessment of the value the scheme represents.

“High quality governance of DC schemes is a crucial part of delivering good member outcomes in retirement. It’s therefore important to take stock of prevailing standards – and identify where improvements can be made,” said Barton.

“It’s not too surprising that smaller DC schemes are not doing everything the regulator now expects. To be fair, the regulatory landscape has undergone considerable upheaval in recent times and the accompanying regulatory expectations have become much tighter and more prescribed,” Barton said. “Larger schemes are generally better equipped to cope with this pace of change because of their resources and their access to quality advice and support.”

Barton said while larger DC schemes were able to benefit from economies of scale and resources, smaller schemes could be well-governed too.

“There is a presumption at policy level in favour of larger schemes. It’s certainly easier for the regulator to effectively regulate fewer, larger schemes because they are visible and can more easily be held accountable. Where does this lead us?” Barton said.

“It seems to point in the direction of more consolidation. Many employer-run schemes have already transferred their DC assets to master trusts, and more will follow once master trusts have passed the authorisation test over the coming year,” Barton said. “The increased standards, scrutiny and enforcement behaviour by the regulator put the heat on more employer-run schemes regarding value – and many will choose to call it a day.”

TPR’s report found that master trusts, which enable pension scheme providers to manage a DC scheme for several employers under a single trust arrangement, were more likely than other scheme types to meet two or more of its key governance requirements.

Assessing value for members was challenging for all sizes of scheme. There had been an improvement in the last year for the number of schemes meeting governance requirements for trustee knowledge and understanding, and core scheme financial transactions.

However, the proportion of schemes meeting the requirement to have a suitably designed default investment strategy had dropped – due entirely to a substantial decline in the number of micro schemes meeting this requirement.

TPR said it would test a more “directive approach” to delivering guidance to trustees as a result of the findings.

Barton said schemes of all sizes would be able to continue to use a DC structure provided they addressed resourcing issues.

“For those that want to stick with DC as an important part of the employer-run proposition, the key thing is to make sure that the scheme is adequately resourced with time, skills and money to keep pace. That principle applies to all DC schemes, big and small,” Barton said.