The UK government is encouraging consolidation in the pensions market, but their focus extends beyond that and also wants to see schemes scale, according to industry experts.
Speaking at a parliamentary hearing to discuss the pension schemes bill, Yvonne Braun, director of policy, long-term savings, health and protection at ABI, said it fully endorse the drive for both scale and consolidation
“The reforms the government is taking forward, particularly around value for money and the contractual override, is super important,” she told MPs.
The contractual override proposal will allow contract-based DC pensions to be transferred to new providers without member consent in certain circumstances.
Braun explained the contractual override is important for contract-based schemes and consolidation.
“That’s a huge part of the market, and will remain a huge part as its gets about half of the inflows – around £6.3bn,” she said.
“These are individual contracts with the saver, and so if a provider wants to move a saver to a more modern fund, they can’t do that without getting that person’s individual consent and as we all know, engagement is pretty low in pensions so this contractual override is important for consolidation.”
She also explained the value for money reforms will play a key role in this.
“There is a huge focus, dare I say an obsession, with keeping things as low cost as possible and using that as the yardstick when choosing a pension scheme.
“That’s a huge problem for this industry, because we are really only the supply side, but we also need to change the demand side.”
Also appearing at the hearing was Chris Curry, director of the Pensions Policy Institute, who said consolidation has been either implicit or explicit in much of the policy that has happened over the past 10 years or so.
“We have to be careful not to just assume that consolidation automatically scales.
“If we’re talking about consolidation in a part of the UK market, it is still fragmented. It’s not just trust based DC. There is still a contract based DC.
“Putting those together might be another way to consolidate and get scale, but then we still have the defined benefit private sector and defined benefit public sector.
“When we’re talking about comparing with what happens overseas, they generally have much less fragmentation and a much more singular market.
“So consolidation is important, but I think the focus for the government at the moment is much more on scale, rather than necessarily just consolidation.”
Meanwhile, Joe Dabrowski, deputy director at Pension and Lifetime Savings Association, said consolidation in the DC sector is a long-term trend.
There has been a 40 per cent reduction in the number of DC schemes in the system over the past five years.
“In the bill itself, we have the value for money regime, which will be supported by the FCA, DWP and TPR consultations thereafter.
“What we also expect from the Mansion House consultations is the introduction potentially of scale tests in the master trust space, in particular, to try and drive some of that scale by 2030.”
However he explained some questions remain unanswered, such as how to make sure the system continues to have innovators and new entrants.
“If you get scale, we don’t want to end up in a market that is very narrow, where you have very few providers and innovation and customer service has not been forefront on progress.”
“Overall, we’re supportive of that general direction, but there’s a lot of nuance that needs to be considered.”
Value for money
MPs asked experts their views on whether the industry is equipped to implement the value for money framework.
Rachel Croft, chair of the Association of Professional Pension Trustees, said: “Since 2021, schemes with £100mn of assets or less have had to do some form of value for money framework.
“It looks as if the new requirements that are likely to be in the pension schemes bill will add quite an onerous new set of requirements on schemes, with multiple new data points. That is likely to achieve further consolidation in and of itself.”
Elsewhere, Curry said value for money, a bit like consolidation, is something which has been on the agenda for most pension schemes for quite a long time.
“At PPI, we’ve done some research looking at international comparisons of what happens in other countries and what works and what doesn’t work.
“Obviously with international comparisons it’s very difficult, because each system has its own unique features, the cultures are different, the politics around things are different as well.”
He argued transparency is really important in value for money, because it’s only really helpful if people can actually make any decisions or take action.
“It’s easy to understand, even if it doesn’t give you the full picture on value for money,” he said.
“The framework is really helpful in starting to broaden that discussion out into different things, but it’s not just about cost.”
He said the real test is going to be whether you can take that information and make it something which is easy to present and easy to understand.
“This is where we’re going to struggle, because each different pension scheme across the different sectors all have different advantages and disadvantages,” he added.
“So being able to say this is a good pension scheme in terms of value for money, but this isn’t such a good one, may well depend on what you’re looking at.”
sonia.rach@ft.com
