Earlier this year, the Pensions Regulator (TPR) announced that total memberships in defined contribution (DC) pension schemes had, for the first time, overtaken defined benefit (DB) schemes.
TPR’s annual DC Trust report shows that, with the introduction of automatic enrolment, DC schemes have become the dominant form of pensions provision, with around 14.8 million memberships in DC schemes compared with 11.7 million in DB arrangements.
With the growth of DC, we can expect more legislation and regulation affecting DC pension schemes. In this article we take a look at three of the initiatives currently underway.
Bulk transfers between DC schemes
Currently, DC schemes (other than stakeholder schemes) are able to undertake a bulk transfer without member consent subject to;
- obtaining an actuarial certificate which certifies that the rights to be acquired by the transferring members under the receiving scheme are “broadly no less favourable” than the rights being transferred
- satisfying a 'relationship test' between the receiving and transferring schemes.
The DWP recently consulted on simplifying the process to reduce unnecessary burdens on pension schemes whilst still ensuring members’ rights are fully protected. Importantly, as the current process was designed with DB schemes in mind, the DWP accepts that the broadly no less favourable test may not be suitable for DC schemes and that other measures may be more appropriate.
The DWP asked for views on:
- changing the actuarial certification test asking whether the certification could be given by another “appropriately qualified independent person”, or allowing the trustees of a scheme to certify the transfer in accordance with relevant guidance
- what could be done to simplify the relationship test requirement in relation to schemes with small pots (where, for example, the test prevents a single employer from transferring out former employees) and orphaned schemes (for example, where the employer has been dissolved and there is no longer a scheme trustee).
Bulk transfers from stakeholder schemes have to satisfy different requirements. The DWP asked whether there is scope to amend or remove any of the current restrictions.
The call for evidence closed on 21 February 2017. The DWP hopes to firm up any resulting proposals during 2017 and to make any legislative changes that it deems necessary by April 2018.
Any changes that will make a bulk transfer without consent between DC schemes easier are likely to be welcomed by employers and trustees. With the increasing focus by Government and the Pensions Regulator on improving standards in DC pension provision, they may also lead to the consolidation of smaller DC schemes. The regulation of master trusts is another step likely to lead to that outcome.
“21st Century trusteeship”
TPR has stressed the importance of good governance of all pension schemes in its response to the consultation it ran last year on 21st Century Trusteeship. It confirmed that it will take three steps in 2017 to improve scheme governance:
- using education and tools to improve the standards of trustees who are not performing their duties as expected
- clearly outlining the high standards it expects of trustees
- tougher enforcement against trustees who are failing in their duties.
TPR’s view is that many small DC schemes may have trustees who are failing in their duties. In its response, TPR singled out such trustees, stating that it would ask them to assess whether they meet the required standards and if they find that they cannot, or they find it difficult to achieve value for members, to consider whether alternatives such as consolidating their scheme into another scheme may be more beneficial.
TPR is working with the DWP and with pensions professionals to identify barriers to consolidation and how they can be overcome. It is open to a range of options including shared service platforms, consolidated trustee boards and scheme consolidation (within, for example, an authorised master trust).
Within weeks of publishing its response, TPR again signalled its growing concern about the fragmentation of DC provision and the persistence of a tail of sub-scale schemes. It believes that such schemes pose an unacceptable risk to member protection.
It intends to tackle the problem on several fronts, by launching the implementation phase of its 21st Century Trustee initiative shortly and also by launching the new authorisation and supervision regime for master trusts “to try to create a secure, scalable and value for money cornerstone of the multi-employer DC savings market”.
It seems that the Government and TPR have decided that they need to act decisively over poor governance in small DC schemes by exerting greater pressure on such schemes to improve or to consolidate.
Automatic enrolment review
The Government announced a review of automatic enrolment to ensure that it continues to encourage people to save into a workplace pension. The review will look at a number of issues including:
- whether the existing scheme could be improved or further simplified
- how those who do not meet the criteria for automatic enrolment (including those who are self-employed and those with multiple jobs) can be assisted in saving for their retirement.
The terms of reference for the review include looking at the timetable for phased increases in contributions, current thresholds and the staging forecast up to 2018. The Working Group (which consists of a DWP team supported by an external advisory group) will also consider wider issues, such as the introduction of the new state pension, changes to the state pension age and the Lifetime ISA. It will need to consider the charge cap review taking place this year, including whether transaction costs should be covered by the charge cap.
The intention is to publish the Working Group’s findings by the end of 2017.
The DWP has also confirmed that the automatic enrolment earnings trigger for 2017/2018 will remain at £10,000 and that the qualifying earnings band will continue to be in line with National Insurance contributions' lower and upper earnings limits ( therefore the figures for 2017/18 are set at £5,876 and £45,000 respectively).
As well as these three initiatives affecting DC schemes, others are currently underway, ranging from major pieces of legislation (the Pension Schemes Bill) through to consultations (such as the cap on early exit charges) and FCA initiatives (for example, on transaction cost disclosure). Employers and trustees should note that the increasing popularity of DC schemes is causing closer scrutiny of how they are set up and run which in turn is likely to lead to greater regulation and intervention on the part of the Government and the regulators.