The government's proposed defined contribution (DC) pension reforms are well-intentioned but risk having unintended consequences or being limited in their effect, industry experts have warned.

On 2 March, the Treasury revealed plans to require DC schemes to disclose their level of investment in the UK and to prevent underperforming schemes from taking on new business.

While some in the industry welcomed the proposals, LCP partner and head of DC, Laura Myers, said that simply requiring schemes to list their investments in the UK will have “little effect”.

“There are big issues about what counts as domestic investment and just having to report something will not in itself change behaviours,” she stated.

“Trustees will be looking for the best returns wherever they can get them, and publishing statistics on UK investments will not change that.”

Meanwhile, LCP partner, Steve Webb, warned that the “threat of effectively shutting down” pension schemes that have relatively poor investment returns risked causing the whole industry to become “very risk averse”.

“Sometimes it is necessary to take investment risk to achieve the best returns, but those risks don’t always come good,” he added.

“The penalty for being an outlier will be so great that this new approach could rein in the top performers as well as challenging the under-performers.”

Pensions Management Institute president, Robert Wakefield, expressed concerns that the changes will compromise the control that trustees exercise over their investment decisions.

"It is possible that these reforms will adversely affect trustees’ fiduciary responsibilities," he said.

"Currently, trustees’ policy concerning the selection of investments is set out in their Statement of Investment Principles, and trustees are required to explain their rationale for choosing specific asset classes.

Creating pressure on trustees to invest in UK equities to a greater extent than is the case currently would compromise their autonomy. As it is, it is hard to see how a meaningful apples-with-apples performance comparison could be made.

“We are also perplexed by the proposed sanctions for underperforming DC schemes. The authorisation regime for master trusts already empowers The Pensions Regulator to force poorly performing master trusts to merge, so these new changes would only apply to single-employer trusts. It is also unclear how contract-based schemes would be affected.”

While Aegon head of pensions, Kate Smith, welcomed the confirmation that the government and Financial Conduct Authority (FCA) would be consulting further on the value for money (VFM) framework, she also warned that “much care” was needed in defining a poorly performing scheme.

“Different schemes can adopt different investment strategies which can lead to divergence in returns in the short term, making it important to assess investment performance over a sufficiently long timeframe,” she continued.

“Just as schemes can be different, so too are the employers they serve. One key aspect of the consultation will be making sure comparisons against larger schemes of over £10bn produce meaningful results.

"Currently there are few schemes with assets of over £10bn, and fewer commercial schemes which will be prepared to allow poor value schemes to consolidate with them.

“Importantly, it costs less as a percentage of funds to run a scheme for a large employer with a stable workforce and high average contributions than one for a small employer with low contributions and high staff turnover.

“We understand the government’s and regulator’s desire to speed up scheme consolidation, but this needs to be reflected in the framework to make sure all cohorts of employer can assess the value they are receiving compared to others like them.”

Furthermore, although Smith said that mandating the disclosure of investment in UK businesses was likely to bring more focus, transparency, and comparability to geographical assets allocation, she argued there needed to be an unambiguous definition of what constitutes investment in the UK for it to be effective.

Pensions and Lifetime Savings Association (PLSA) director of policy and adequacy, Nigel Peaple, stated that the association had engaged closely with the FCA and government on developing proposals for a VFM regime, and it was pleased to see the government’s continued affirmation that investment decisions must be taken in the interest of pension scheme members.

“The pension industry has long supported transparency in asset allocation for all pension schemes and the introduction of a VFM regime for DC pensions,” he noted.

Hargreaves Lansdown head of pensions and retirement, Jack Williams, said that while there was still a lot to be nailed down in the proposals, “not least” what qualifies as a UK company, offering investors more transparency was ultimately a step in the right direction.

“Those who are already aware their pension is invested will want to know where their money is going, and this could give them easier access to this information,” he continued.

“Once people understand more about their investments it enables them to make more informed choices and secure better outcomes.

“It would be good to see this quest for more transparency expanded to other aspects of pensions, including service and the support offered by pension firms. With proposals for lifetime pensions on the table, this would give people the opportunity to choose the pension and investments that best suit their needs.”

However, the reforms will pose challenges for the workplace pensions industry, Quilter head of retirement policy, Jon Greer, noted, with the new disclosure requirements to put pressure on schemes to justify their asset allocation decisions.

“The Chancellor will have to walk a fine line between encouraging investment in the UK economy and ensuring that pension funds are not exposed to excessive risks or costs,” Greer stated.

“The government’s consultation with the FCA will be crucial to strike the right balance and safeguard the interests of both savers and businesses and no doubt there may be some resistance from the FCA if it doesn’t see the disclosure of UK investment necessary to prevent or address a specific consumer harm.

“Though these reforms could have a direct impact on workplace pension savers in terms of outcomes, for the majority it will mean very little. This is because workplace pension saving is driven heavily by inertia and the level of engagement is already known to be very low, and these reforms are unlikely to do anything to change that.

“However, what it will do is make it easier for policymakers to assess the extent to which default funds are holding UK investments and this is the key point.”

Fidelity International head of platform policy, James Carter, welcomed the government’s “continued focus” on the VFM framework and supported a more holistic assessment of VFM, noting that the “longstanding market focus” on charges alone narrowed the opportunity for innovation and use of wider asset classes.

“As part of today’s announcement, the government has reaffirmed its broader ambition to stimulate investment in UK markets, and while greater transparency of allocation to domestic assets may support this, it is imperative that DC pension schemes maintain discretion to follow the strategy they believe is in the best interests of members,” he continued.

“The work of The Pensions Regulator (TPR) has consistently showed that certain profiles of scheme continue to be less well governed. The move to empower the regulators to act where acceptable value is not provided is welcome but will need to be implemented carefully to avoid negative impacts on members.

“We are pleased to see acknowledgement of the need for a consistent framework to be applied by both the FCA and TPR and across all DC pension schemes. However, divergence in implementation timelines remains a concern as it risks distorting the market and would therefore welcome greater emphasis upon alignment.”

Finally, People’s Partnership director of policy, Phil Brown, said it was “only a matter of time” before the proposed VFM framework developed teeth, and while this could be “very challenging” for some, the government had long signalled its intention to consolidate the workplace pensions market and drive better value for savers.

“We think that the VFM framework should be extended to retail pensions now,” he added.

“Without transparency and comparability, most people face a choice they aren’t prepared for, unless they are paying for financial advice.”

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