Proposals outlined in the latest government consultation to drive further consolidation in the defined contribution (DC) pension market have received a mixed response from the industry.

The Future of the DC pension market: the case for greater consolidation consultation sought views on the barriers and opportunities for increased consolidation amongst DC schemes with between £100m and £5bn in assets, and on the barriers to schemes with less than £100m winding up and consolidating.

Alongside the consultation, which closed yesterday (29 July) the Department for Work and Pensions (DWP) stated that trustees of schemes with less than £100m in assets will need to carry out annual value for money assessments.

Responding to the consultation, Smart Pension director of policy and market engagement, Darren Philp, said: "We believe the DWP is right to focus on improving value for members. While some small schemes can provide good value, unfortunately that is not the case for a large number of schemes so we think the drive to improve value, and hence force consolidation, will be a feature of the DC pensions landscape in the years to come.

"We believe all schemes should provide value to members and do so in a demonstrable way - no matter what shape or size. The new value for money test for schemes below £100m should force consolidation, but we need to see what the impact of this is to understand whether or not it is an effective intervention.

“Naturally we would expect this threshold to gradually rise over time as the measure beds in. Measures also need to take into account the potential growth of the scheme, through, for example, regular and increasing contributions.”

Philp called for the government to implement a roadmap for gradually increasing the value below which value for money assessments need to be made, based on evidence from assessments for schemes below £100m, and to introduce a requirement for all workplace schemes and providers to publish a “common and consistent” value for money assessment.

He also urged the government to consider introducing regulatory easements for trustees and sponsors of ceding scheme if they are consolidating into an authorised and price capped master trust, and an authorisation and supervisory regime for single employer trust schemes.

Aegon head of pensions, Kate Smith, warned that ‘phase two’ of the consolidation plans, whereby schemes with between £100m and £5bn in assets would be encouraged to consolidate, would not automatically lead to better value for money or member outcomes.

“Instead, this trend could stifle innovation and create a rush to basic vanilla offerings,” she continued. “Furthermore, just because a scheme is larger doesn’t mean the trustees will necessarily decide it’s in the members’ interests to invest in certain types of asset such as illiquids or infrastructure.

“There can be other ways of delivering better value for money and improved outcomes without consolidation but the government’s focus on driving consolidation could discourage trustees from exploring these.

“We urge the government to put any ‘phase two’ consolidation on hold until the results of phase one are clear. With phase one not yet started, even speculating on a second phase is premature and risks unduly influencing trustees’ approach to phase one, and not necessarily in a positive way. Trustees won’t be keen to consolidate into a larger scheme if that in turn could face pressure to consolidate under a later phase.

“Trying to accelerate scheme consolidation further will create shortages of such advice and bottlenecks in consolidator schemes’ ability to take on new employers.”

Premier head of DC consulting and technology, Sue Pemberton, commented that although the overall objective was “clear and well intentioned”, and should lead to poorer performing schemes consolidating, there could be unintended consequences for smaller, well run schemes.

“With this new regulatory burden, and additional legislation coming down the track, many trustees may struggle with the extra work required,” she stated.

“Although they may be able to provide all the information necessary, they may not ultimately be able to afford to do so. The sheer amount of regulation may result in the demise of many well governed schemes, with strong investment performance and competitive charges.

“Smaller schemes delaying this decision could also find that they are competing for terms in a more difficult market. The increased pressure on larger schemes to consolidate has already seen more movement in this area and will not make it any easier with providers being able to cherry pick the most commercially attractive schemes, leaving some smaller ones struggling.
 
“We believe there is an urgent need for smaller well run schemes to not only look at this legislation, but view the impending roadmap and weigh up all of the forthcoming legislation and increased regulatory burden and decide the best course of action before it is too late.”

The Investment and Savings Alliance head of retirement, Renny Biggins, welcomed the consultation and said the organisation was “fully supportive” of the DWP’s objective.

However, he warned that improving value for money in DC pensions cannot be achieved through consolidation alone.

“The focus should be on ensuring that trustees have the guidance and support to ensure that the annual assessment is undertaken in an effective and meaningful way,” Biggins continued. 

“Any additional consolidation incentives should not play a part in a market functioning as intended. These could lead to schemes winding up even when it is not in the best interests of its members and raises the question of the validity of the assessment, which highlights the need for strong and effective governance from The Pensions Regulator. 
 
“Where a consolidation exercise does take place, it provides a good opportunity to engage with pension scheme members, particularly those who are deferred who may have disengaged with their pension saving.”

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