DWP to require DC schemes to publish net returns

Defined contribution (DC) pension schemes will be required to publish net investment returns as part of their chair's statements, the government has confirmed.

Trustees of all relevant schemes will be required to state the net returns for their default and self-selected funds annually.

Responding to both its consultations on Incorporating performance fees within the charge cap and Improving outcomes for members of DC schemes, the Department for Work and Pensions (DWP) said trustees of smaller DC schemes that do not demonstrate value for money will soon be required to take immediate steps to wind up the scheme and consolidate.

DWP added that trustees of these poorly performing DC schemes with assets of less than £100m should only look to avoid consolidation in “exceptional circumstances”.

It further explained that trustees should only opt to try and improve a poorly performing scheme without consolidation if they had a “solid reason to believe that they can make all required improvements cost-effectively and efficiently, despite having failed to demonstrate this at assessment”.

In order to determine the schemes’ delivery of value for money, an annual assessment, which would be carried out as part of the chair’s statement, will examine factors such as costs and charges, net investment returns, and measures of administration and governance.

The DWP’s response said: “It is not acceptable for savers to be enrolled in arrangements that do not deliver value in terms of costs, investment returns or secure and resilient governance.

"Government would expect trustees acting in the best interests of their members to take appropriate action to wind up and consolidate without The Pensions Regulator needing to exercise its powers.”

Pensions Minister, Guy Opperman, added: "While the focus of these regulations is on schemes with assets of less than £100m, the principle of ensuring value to members applies to all schemes.

"The call for evidence published alongside this document begins the next conversation on what best value looks like for the millions of pension savers in medium and large schemes that are not in scope of the new value for members’ assessment."

The implementation date for the application of value for money assessments was set for October 2021 for DC schemes with assets of less than £100m that have been operating for at least three years, but this has now been pushed back to 31 December 2021 to allow schemes extra time to prepare.

On consolidation, DWP concluded: “We believe that the proposed measures outlined in this chapter will improve outcomes for savers by encouraging trustees to consider consolidating to ensure savers are in well-run schemes that deliver good value for members and that have the scale to invest in a diverse range of asset classes, including illiquids.

“The government views accelerating the consolidation of the DC market into fewer, larger schemes as a priority. For this reason, the efficacy of any amendments made to regulations such as the current proposals will be kept under review. If any new requirements do not drive consolidation at sufficient pace, the government will develop legislation to mandate consolidation.”

Additionally, the DWP said DC schemes will be able to smooth performance fees over a five-year period, with the aim of allowing greater investment in illiquids within the 0.75 per cent charge cap on workplace pensions, stating that it was for trustees to decide whether a performance fee represented the best value for their members.

The requirement for performance fees to be prorated will be eased, with the DWP explaining that this did not make sense as the charges could vary throughout the year, although the DWP said it would only allow trustees to exclude a performance fee from their calculations where it is accrued each time the value of the investments is calculated.

This proposed easement for performance fees would apply to the first charges year, which begins after 5th October 2021.

Putting the proposals in context, DWP said: “The fact that competition between schemes is based mainly on the level of charges may well lead to a perception that cheapest means best value. This is not a new phenomenon.

“Before the introduction of the charge cap, when employers did compare pension schemes it was likely that they would prioritise low charges rather than scheme quality or governance. We want to make it clear that good value for money is about more than just low fees, and that investment returns must always be considered as part of assessing value.”

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