Consultation risks taking DC pension consolidation ‘too far, too fast’

Proposals outlined in the Department for Work and Pensions’ (DWP) most recent consultation on further consolidation in the defined contribution (DC) pension market risks taking consolidation “too far, too fast”, according to Hymans Robertson.

In its response to the consultation Future of the DC pension market: the case for greater consolidation, Hymans Robertson warned that taking consolidation further and faster would be “counter-productive”, and reduce competition and innovation.

“Since DC took over from defined benefit (DB) as the main source of pension provision in the UK and auto-enrolment was introduced, DC assets have increased massively,” stated Hymans Robertson partner, Lee Hollingsworth.

“But this still remains relatively small compared with what we expect to see in the future. Now is not the time to accelerate the pace of consolidation.”

Hollingsworth noted that the impact of phase one of the consolidation process was still being seen and “will take some time to work itself through”.

“We’d hope, and expect, that this will result in a functioning, competitive environment of about 20 providers each managing assets in excess of £10bn,” he continued.

“Master trust providers are still in the process of acquiring scale post-authorisation making the provider market in this area still relatively immature. We are also seeing that the benefits of consolidation are weighted towards larger employers.

“Today many large single trust schemes still provide a superior all rounded offer to the consumer. The market is simply not, yet, ready for more.”

Hollingworth also highlighted the importance of employers continuing to engage with their pension schemes.

He stated that employees see their employer as a trusted source of financial information and warned that widespread outsourcing through master trusts could see employers becoming less involved in the retirement outcomes of their workforces. 
The DWP had also launched a consultation on proposed measures to allow occupational DC schemes to smooth performance fees for private markets and new models for accessing illiquid assets.
Commenting on these proposals, Hymans Robertson senior DC consultant, Callum Stewart, raised concerns that driving regulation in this area too soon could risk losing a “golden opportunity” to learn from innovation.

“Emphasis should instead be placed on improving levels of transparency of costs and charges, and not over-regulating the frameworks for their assessments,” he commented.

“Trustees, for example, already need to satisfy that changes to the investment approach are in the interests of their members.
“By smoothing performance fees, members will pay a generally higher fee level at times when the fund is under-performing and this is something we don’t feel is consistent with delivering good outcomes for all members. We note that the smoothing of performance fees is, rightly, optional in the regulations coming into force from October this year.
“The current proposals for Long Term Asset Funds do not appear to address the significant practical challenges that exist for DC schemes to invest in private markets assets. Indeed, the proposals appear to introduce additional governance burden and risk and we are unconvinced that they will offer a sufficient competitive advantage for trustees to select relative to other opportunities.
“Ultimately, there are better ways to access illiquid assets for DC and prefer to allow time for the market to innovate towards best in class solutions.”

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