Consolidation | People's Partnership

The UK occupational defined contribution (DC) market is one of the least consolidated in the developed world, but things are changing. Single-employer DC trusts are in the spotlight.

At the time of writing, there are 2,180 pension schemes in the UK. That’s considerably more than Australia, for example, with just 233, and Mexico, which has only 11 workplace pension schemes.

A growing trend for consolidation

The Pensions Regulator (TPR) and the Department for Work and Pensions (DWP) are encouraging consolidation in the UK DC landscape, promoting fewer, higher quality, better regulated schemes.

Single-employer DC trusts are being pushed along by a unique range of factors, including greater costs. Short service refunds were abolished just over 4 years ago. This prompted a rise in membership and a proliferation of small pots for many active DC pension schemes. However, for the larger number of smaller pensions schemes who offered this option, it can be costly and complicated to administer.

In the same year we saw the new 0.75% charge cap for default funds. Larger schemes, like The People’s Pension, have used their scale to make sure high-quality investment options remain available below this rate. Smaller schemes may have difficulty achieving this and, if they want active investment options, the charge cap poses significant challenges.

Regulators expect high standards of governance

Other pressures come from The Pensions Regulator. Its 2016 paper on 21st century trusteeship offered clarity on what they expected of pension scheme trustees. This includes:

their roles
board composition
risk management
and a host of other issues.

This renewed focus makes it abundantly clear that the expected standard of governance is high.

The regulator has also pointed out to trustees its high expectations of both transparency, not least in the chair’s annual statement, and good investment choices for members. DWP regulations also mean trustees must strengthen their approach to environmental, social and governance (ESG) issues in their investment options.

Trustee boards are now required to consider ESG. And this means time and money spent on adopting new policies and working with investment managers to offer new options. These are all material changes – requiring substantial amendments to working practices, policies, processes and the amount of time individual trustees spend on governing their schemes.

Trustees are feeling the pressure

Trustees that signed up to the role expecting a specific time commitment will be interested that the regulator is now asking whether quarterly meetings are enough – and whether the board should meet every month instead?

This increased burden on trustee boards is laid bare by data from the regulator. They have 5 key governance requirements – which range from independence to providing good value for members.

According to a May 2019 TPR report, just 23% of all pension schemes met 2 or more of these requirements. This is perhaps unsurprising, given that in the pensions market, the benefits of scale can be felt in governance, good value and the quality of investment options.

Master trusts: an option for consolidation

If the occupational DC pension market continues to consolidate it seems reasonable that trustee boards of single-employer DC schemes will look at master trusts as a possible consolidation option.

Master trusts operate under the same regulations and laws as single-employer DC trusts, unlike contract-based schemes, commonly referred to as group personal pensions. This means that the trustees have the same direct responsibility toward members’ best interests. Master trusts are just one of several available options, which is why we’ve created a ‘key considerations guide’, setting out what the journey could look like.

Find out more about what to consider on our webpage about consolidation of trust-based occupational pensions.

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This article was written when we were B&CE, before we changed our name to People’s Partnership in November 2022.

Watershed moment – big is beautiful

Master trust authorisation is at a critical point. Applications have been submitted to The Pensions Regulator and industry predictions suggest the result will be a small number of big players managing workplace pension schemes in the future.

The ultimate aim is for auto-enrolment to evolve into a more stable and effective system of retirement saving. So although we’re taking a different approach we’re heading in a similar “big is beautiful” direction to the multi-trillion dollar Australian pensions system where AUS $2 trillion of assets are managed by around 225 funds.

Play catch-up but don’t play with fire

We’re still a few steps behind so it’s a good opportunity to take stock. One thing is clear to me – we must learn useful lessons from Australia and avoid pitfalls. My colleague Gregg McClymont has previously analysed the issues and lessons around various scandals which hit the industry. Read his thoughts here.

I agree that the shocking headlines about greed and misconduct by banks and other commercial providers should serve as both a warning and an opportunity. At the heart of this is the question over proprietary/for-profit compared with not-for-profit – something I discussed with colleagues and financial advisers at a recent event we, The People’s Pension, organised.

To profit or not-for-profit?

In Australia, the numbers stack up in favour of not-for-profit funds which make up the top 10 performing pension funds across short and long time periods. Even before official enquiries were launched into banking and superannuation, people could see the long-term financial benefits of not-for-profit – or profit-for-member as they are often referred to in Australia.

The “profit-for-member” terminology resonates well for me, coming from an organisation which has a firm commitment to putting people ahead of profit. The People’s Pension has no shareholders to answer to so we can genuinely ensure that any profits are ploughed back into improving value and service for our customers. Our Charitable Trust also gives back to society and individuals as part of our mission. I’m proud of all this from a moral standpoint but I also believe it’s a good approach for the industry – and retirement planning – in the UK as a whole.

Where does this leave us?

At The People’s Pension we’re fortunate (as are our 4m members) as one of the largest master trust workplace pensions in the UK that we can provide stability and experience in the pensions landscape. We should build on the consolidation process of master trust authorisation and champion the value we can offer people through a long-term, “profit-for-member” approach to pensions.

Anyone focusing on chasing short-term returns or making bad decisions in the interests of sponsors rather than members should take heed of the Australian lessons. If we can all do that, then hopefully big really will be beautiful for British pensioners.

Glenn Dobson is a former National Development Team Manager at B&CE, provider of The People’s Pension. He has been replaced by Phil Taylor.