We last week received the final report from the UK government on its pensions investment review.
This was initiated shortly after Labour came into power, with the aim of driving consolidation, building scale, improving member outcomes and “tackling waste”.
But arguably the key aim was to make sure defined contribution pension schemes are supporting the government’s drive for UK growth by investing more in productive assets with a specific UK focus.
The final report was accompanied by the government’s response to the consultation: “Unlocking the UK pensions market for growth”.
There may never have been such an exciting time to be advising on workplace pensions
Legislated for alongside a raft of further initiatives in the pension schemes bill, these reforms mark a significant shift towards workplace pensions being bigger in scale, bolder in their approach to private assets and more British in their investment focus.
The final report also heralded major changes to the Local Government Pension Scheme, which are not covered here.
The headlines
The final investment review report brings together a range of significant changes for multi-employer schemes and providers.
The headline is the drive for “megafunds” of at least £25bn by 2030, with some limited transitional measures and exemptions.
There is the announcement of new “contractual override” regulations that will allow providers to transfer members of contract-based pensions in bulk without individual member consent.
As a result of the Mansion House Accord, the government has held off mandating minimum investment allocations but has kept powers to do so if needed in future.
Finally, after consideration, employer benefit consultancies (EBC) and corporate advisers are not at present being brought into Financial Conduct Authority regulation.
These changes need to be considered alongside the value-for-money (VFM) framework, which will introduce a standardised and highly detailed assessment of default arrangements based on investment performance, service quality and costs and charges.
This will apply across both multi-employer and single-employer schemes.
Overall, every UK DC pension scheme will be affected in some way, and corporate advisers and EBCs have a key role to play in guiding their clients through the coming years of transition.
Minimum scale requirements
By 2030, all multi-employer schemes and providers — master trusts and group personal pensions — must operate at least one main scale default arrangement with assets of £25bn or more.
The test is at arrangement rather than underlying fund level, as this is where investment strategies — such as which asset categories to invest in — are set.
Providers and master trusts will also be expected to build in-house investment capability commensurate with their scale.
Failure to meet the scale threshold means being barred from operating auto-enrolment, and so winding up and consolidating arrangements into another eligible default.
The government previously consulted on setting a maximum number of default arrangements for each scheme or provider.
While they are not taking this forwards, the scheme or provider will be expected to consider consolidating members in other default arrangements into a main scale default unless “there is a clear and demonstrably beneficial reason for them to remain in another arrangement”.
In 2029 the government will review progress here towards a less fragmented market.
Transitional arrangements and exemptions
Where a scheme or provider has a default arrangement with at least £10bn in assets by 2030 and credible plans to reach £25bn by 2035, they can apply to the regulators to access a transitional pathway.
There will be other conditions here related to investment strategy and governance.
There will also be exemptions from the scale test for default arrangements that are designed for groups with protected characteristics such as religion, certain hybrid schemes and where necessary for an employer to manage conflicts of interest.
To maintain innovation and competition, multi-employer collective defined contribution schemes, which the government is keen to encourage, will be exempt from the scale test.
There will also be a pathway to seek authorisation for a new default arrangement that is bringing something significantly different to the market and also has plans to achieve the minimum scale over the longer term.
Contractual override and consolidation
Currently, while trustees can transfer members in bulk between arrangements, this is not possible for contact-based pensions. Here, the provider must first obtain individual consent from each member — a major blocker to consolidation.
So it is welcome news that the government will legislate to level the playing field with trust-based schemes, allowing bulk transfers without individual consent.
The FCA is expected to consult on the rules later this year, with implementation likely in 2027.
To make sure members are protected, providers wishing to use this will need a “positive assessment from an independent third party”, such as an independent actuary or a suitably formed independent governance committee, showing the transfer is in members’ best interests.
Members will be given the chance to opt out and transfer instead into their alternative chosen arrangement. Active employers will also be notified and possibly consulted.
No mandation on investment allocations
It has been very clear that the government wants DC schemes to invest more in private assets, including within the UK, and there has been much speculation over whether it would mandate minimum investment allocations, something that would have been controversial, potentially conflicting with trustee fiduciary duties and the FCA’s consumer duty.
It was also clear that the government had a preference for the industry to make voluntarily commitments, and this is where the Mansion House Accord fits in.
Aegon UK is one of the 17 major pension providers that have signed the accord, committing to allocate 10 per cent of main default assets to private markets, with 5 per cent in UK assets, by 2030. This is subject to being in members’ interests.
It also came with the condition that the government needed to play its part in facilitating a pipeline of UK investment opportunities, something also addressed in the final report.
The upshot is the government has stopped short of mandating allocations for now.
However, starting later this year, the regulators will survey movements in asset allocations, and the pension schemes bill will include reserved powers around mandation if needed in future.
What else is not changing for now?
The government consulted on bringing corporate advisers and employee benefit consultants within FCA regulation, to ensure that advice to employers considered the full range of VFM criteria. This has been parked for now.
There will be no ban on providers operating differential pricing based on employer membership profiles, but market practices will be monitored.
Also, employers will not face new regulatory duties to consider wider VFM when selecting their auto-enrolment schemes, although the new VFM framework is expected to make this easier.
What is next?
These changes alone are highly impactful on the multi-employer workplace pensions market.
When combined with the pension schemes bill’s initiatives around the VFM framework, small deferred pots and guided retirement solutions, we have an extremely busy and complex time ahead.
Aegon has been calling for a logical and practical road map of change, and we are pleased the government has committed to publishing their version of this soon. Let us hope it is logical and practical.
Implications for advisers
The direction of travel is clear: the UK pensions market is moving towards megafund scale, with a stronger emphasis on private markets and UK investment.
Corporate advisers and EBCs will be instrumental in helping employer and trustee clients understand what lies ahead — explaining new investment approaches, assessing provider-led changes, reviewing impacts on member outcomes and considering future options.
With the landscape set to change dramatically over the next five years, there may never have been such an exciting time to be advising on workplace pensions.
Steven Cameron is pensions director at Aegon UK
