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Article | Global News Briefs

UK: Proposals to accelerate the consolidation of smaller DC plans

Retirement|Health and Benefits|Total Rewards
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By Mark Dowsey | September 23, 2020

The proposals aim to improve outcomes for DC plan members by consolidating smaller plans into larger plans if they can’t demonstrate value.

Employer Action Code: Monitor

The Department for Work and Pensions (DWP) has proposed measures to improve outcomes for members of defined contribution (DC) plans, with an intended October 5, 2021 effective date. The proposals aim to:

  • Drive further consolidation among smaller DC plans by requiring trustees to consolidate their plan into a larger one if they cannot demonstrate value for members (VfM) on a revised “more holistic” basis
  • Encourage the wider use of illiquid asset classes by DC plans

Public consultation on the measures runs through October 30, 2020. For further details, please see our Hot Topics alert: DWP steps up consolidation drive for DC pensions.

Key details

Consolidation — ramping up testing on value for members:

  • Trustees of smaller plans (i.e., those with assets of under 100 million British pounds sterling) would have to carry out annually a revised VfM assessment and report the results to the Pensions Regulator (TPR). The VfM assessment must consider plan costs/charges, net investment returns and seven other measures of good governance, such as quality of recordkeeping and communication and level of trustee knowledge. Plans would have to compare their costs, charges and net returns to those of three other (over 100 million pounds) plans, of which at least one must be capable of receiving a transfer of the plan’s benefits should it wind up.
  • Trustees of a plan assessed as not delivering good value for members would have to take immediate steps to wind up the plan and consolidate members into a larger plan, unless in exceptional instances they can improve value rapidly and cost effectively.
  • All plans would have to publish net investment returns for their default and member-selected funds in the annual Chair’s Statement.

Charge cap review and proposals to accommodate illiquid investments:

  • Current rules limit the annual charge that a member of a DC plan default investment fund may incur to 0.75% of his or her savings in the fund. This charge cap can make it difficult for plans to pay performance-related fees (i.e., those based on a percentage of investment returns) and to invest in illiquid assets. A review of the cap is ongoing, which is looking at how funds can blend in a proportion of illiquid assets and integrate the charges within the cap. The government is aware that some trustees are concerned that future reviews may lead to reductions in the cap, which dissuades them from bringing illiquid investments within current, but possibly not future, headroom. It clarifies within its current proposals that it “will seek to give trustees sufficient assurances so that they are able to make appropriate long-term investment decisions.”
  • The proposals also include an easement to the way prorating of charges operates to exclude the performance element of the fee where members leave or join partway through a year. To access funds such as venture capital, the government is also looking at how to develop a rolling, multiyear approach to performance fees.

Employer implications

The proposals are part of the government’s continuing effort to promote the consolidation of small DC plans (see March 2018 Global News Brief: Revised regulations will make it easier for employers to consolidate DC pension plans). The consultation states that around 60% of DC plans registered with TPR having 100 or fewer members did not meet any of the TPR’s five Key Governance Requirements in 2019. Employers with smaller DC plans should analyze the potential effects of the proposed VfM assessment requirements and measures to facilitate investment in illiquid assets.

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