What does the future hold for defined contribution?

The only certainty in the pensions industry (in my experience anyway) is that there is no such thing as a quiet year. Now that the dust has settled on the Spring Budget tax changes, it is an opportune time to look at what the future might hold for DC.

The growth of DC regulation

Over the last few years, more time and focus than ever before has been spent on DC pension arrangements. Traditionally, these arrangements were occupational pension schemes. However, recent years have seen master trusts, CDC schemes and personal pension arrangements grow in importance and scale with more and more people saving under these arrangements. At the same time, we have seen the rules governing these arrangements multiply many times over. This shift of members away from traditional smaller occupational pension schemes to master trusts, CDC schemes and personal pension arrangements is likely to continue. And it would be reasonable to assume that, as a result, there will be a corresponding increase in the governance burden.

It is worth noting that it isn’t that long ago that there was almost no DC-specific pensions legislation. Over a relatively short space of time we have seen an avalanche of DC-specific governance requirements including the DC code, regulations on governance and charges, all the way up to the latest consultation papers that came out in January – these promise us more new rules matters such as value for members and retirement choices.

Current political mood music

Most of the big legal and regulatory changes in pensions over the last 30 years have followed some sort of scandal and/or a report made by an eminent pensions body.  So, what is the current political mood music telling us about the future of DC pensions?

In a recent article, Jeremy Hunt expressed the view that Britain’s pensions industry is in need of “big reform” to ensure that savers are getting good returns on their pension investments. He also confirmed that work was underway to address these concerns. Apparently, the Chancellor has an eye on pension systems in Australia and Canada as good examples of the advantages of consolidation of smaller schemes into pension superfunds. His view being that fewer, larger schemes would have more ability to make large-scale investments in a broader range of assets, compared to the UK’s larger number of smaller schemes.

Staying with the theme of broadening investment horizons, we have seen some recent publications from the Government and the PLSA on this topic. The Government has published a response to its consultation on its long-term investment for technology and science initiative which aims to establish new vehicles to enable investment in UK science and technology companies from institutional investors, particularly DC pension funds. The PLSA has also published a paper identifying “opportunities to encourage all types of pension fund to invest further in UK growth”. On the DC side, possible initiatives identified by the PLSA include increasing the flow of DC contributions by increasing automatic enrolment minimum contribution levels and also setting out a clear plan for the future of the UK economy, for example on the shift towards sustainable economic growth.

We can also expect to see a continued focus on delivering value for DC savers. Concern over people not having enough money to live on during their retirement isn’t new but is likely to increase in coming years as more and more DC savers approach retirement. Some recent examples include a speech given on 23 May 2023 by Nausicaa Delfas, TPR’s CEO, which discussed value for money (“VFM”), consolidation, trusteeship and governance, and “at retirement” solutions. TPR has also published a blog on protecting DC members from economic volatility. VFM is clearly a key priority, with TPR wanting the industry to “change its mindset” from “prioritising low costs to putting value first”. A response to the joint consultation on the proposed VFM framework is expected to be published in the summer. TPR believes the framework will help put value first by generating a “virtuous cycle of improvement”. Poorly performing schemes will continue to be expected to wind up and put their members into a better-run scheme, and TPR will work with the market to address “barriers or practical issues” to doing so.

Consolidation of DC schemes is another popular theme. In January 2022, TPR noted that the UK’s occupational DC pension market had consolidated by nearly 40% (38.64%) in a decade commenting that this was “good news for savers”. It seems clear that this trend of DC consolidation is something TPR expects to continue, particularly as smaller schemes with less than £100m in assets are now required to demonstrate that they provide value for members.

Increasing TPR/FCA overlap

Staying with the theme of consolidation, we may also see increasing levels of collaboration between TPR and the FCA as the lines between their respective territories become more blurred. As things currently stand, the rules for occupational pension schemes, master trusts and CDC schemes are set by the DWP and regulated by TPR whereas personal pensions fall under the remit of the FCA. However, it is already the case that providers of personal pensions can’t ignore TPR when those arrangements are workplace pensions used for auto-enrolment (under the remit of TPR) and there are some aspects of personal pensions that also come within the DWP territory (eg whistleblowing reporting).

Interestingly, the DWP’s review of TPR published in April 2019 noted that TPR and the FCA were already working together effectively on industry issues. It also included references to bringing TPR more in line with the FCA in terms of its powers and rules (rather than guidance) approach to regulation.

The relationship between the FCA and TPR has always been the subject of gossip. As far back as 2006/7 there were rumours about TPR being merged into the FCA.  These rumours surface again from time to time and this is certainly something to keep an eye on as the lines between the remits of these two regulators become increasingly blurred. In terms of what this might look like, we could see more focus on “consumers” rather than “members/policy holders” and a diminishing role for the employer (the employer/employee relationship is perhaps not as key as the provider/consumer relationship in a DC context). We can also expect to see the importance of third parties increasing – administrators, tech/IT support will be vital in helping DC pension arrangements achieve objectives and meet their legal obligations. An unknown quantity at the moment is how this increasing reliance on technology will be regulated in practice in the future.

Finally, pensions dashboards aren’t here yet but will likely drive the pace of change and create even greater consumer expectations and a desire to remove barriers around the wrappers to different kinds of pension benefits.  From the member’s perspective (or the consumer’s – to use FCA language), they will be able to see all of their pension arrangements in one place regardless of whether they are TPR or FCA regulated.   It is widely expected that once this data is accessible we could see significant behavioural changes from pension savers and a greater demand for better financial guidance and support, particularly at retirement.    In other words, we are not going to see a quiet year for DC pensions any time soon.

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