DC consolidation ‘too far, too soon’ but is an inevitability, experts say

Under the proposed rules — announced in a consultation published on June 21, which closes on Thursday July 29 — DC schemes with assets below £100m will have to prove their value for members or face consolidation, a move aimed at improving saver outcomes and steering capital towards green technology and infrastructure investments.

However, Lee Hollingworth, partner at Hymans Robertson, echoed previous calls against the speed of the implementation of the rule, saying that rushing the consolidation process could hurt member outcomes.

Hollingworth said that the immaturity of the DC market makes it “relatively small compared to what we expect to see in the future”, meaning that now is not the time to accelerate the pace of consolidation.

Additionally, the outcomes of the initial phase of consolidations are still to come to light.

“The impact of phase one of the consolidation process is still being seen and will take some time to work itself through. We’d hope, and expect, that this will result in a functioning, competitive environment of about 20 providers each managing assets in excess of £10bn.”

Hollingsworth added that master trust providers are yet to acquire scale following authorisation, “making the provider market in this area still relatively immature”, with the benefits of consolidation being “weighted towards larger employers”.

“Today many large single trust schemes still provide a superior all-rounded offer to the consumer. The market is simply not yet ready for more,” he added.

Furthermore, Hollingsworth said there was a risk that outsourcing through master trusts could make employers less involved in their employees’ pensions.

“High level of employer engagement in their staff pension schemes is still needed. It’s a role that has grown since the introduction of auto-enrolment and surveys have shown that many employees see their employer as a trusted source of financial information against a backdrop of a generally low level of financial education,” he said.

But Darren Philp, director of policy and market engagement at the Smart Pension master trust, argued that the DWP was right to focus on improving value for members, and that consolidation will become a “feature of the DC pensions landscape in the years to come”.

“While some small schemes can provide good value, unfortunately that is not the case for a large number of schemes,” he added.

Philp said the drive to improve value will see consolidation become a common fixture within the space. Although the need for greater clarity on the outcomes of consolidation is important, he said, “to understand whether or not it is an effective intervention”, but he anticipated the £100m threshold would rise as the measure beds in.

In order to smooth the process, the government should “implement a roadmap for gradually increasing the value below which value-for-money assessments need to be made,” Philp noted, but iterated that this should be based on evidence from the initial set of value-for-money assessments being undertaken for schemes below £100m.

Additionally, the government should “introduce a requirement for all schemes and providers in the workplace pensions space to produce and publish a common and consistent value-for-money assessment, which would allow for better benchmarking and comparability,” he concluded.