The government’s planned approach to consolidating defined contribution (DC) pension schemes risks serious harm to the pensions sector and potentially to member outcomes if not amended, according to the Society of Pension Professionals (SPP).
The Department for Work and Pensions (DWP) set out its plans earlier this year to encourage consolidation among DC funds, in particular master trusts. It has set £25bn as its minimum required assets for a default investment arrangement, and given schemes until 2035 to hit this target.
However, the SPP warned this week that the current timeline – with draft rules not expected until next year – risks “paralysis” in the DC sector as providers await clarity on the regulatory landscape.
The trade body called for interim guidance to be issued to help providers plan for the next period.
Chris Austin, chair of the SPP’s investment committee, said: “While the SPP understands the government’s goal of leveraging scale to deliver better outcomes for pension savers, clarity and speed are paramount.
“Waiting until late 2027 for draft regulations leaves the industry in limbo, threatening to stall vital investment and stifle innovation at a time when providers should be preparing for 2030.
“Furthermore, scale cannot be a one-size-fits-all exercise. An overly rigid, age-only definition of investment strategies risks penalising engaged employers, undermining guided retirement pathways, and cutting off essential choices like Sharia-compliant or ESG-focused funds.
“The government must introduce sensible flexibility and early guidance so that the industry can execute these changes effectively.”
More flexible definitions needed
The SPP argued that the government needed to allow more assets to be included in the definition of a provider’s “main scale default arrangement”, such as bespoke defaults for larger clients and self-select investment options.
This would help ensure that “employer engagement is not penalised and scheme scale is not understated”, the trade body said.
The organisation also called for more flexibility around age-based definitions for common investment strategies, to protect those providers using target date funds and “pathways” towards different retirement options.
The SPP also urged the government to revisit its definitions to ensure that corporate entities operating multiple pension arrangements were properly captured, but also given clear regulatory clarity around governance structures to reduce conflicts of interest.
The SPP’s concerns echo some of those expressed by members of the House of Lords during debates on the Pension Schemes Act earlier this year. Peers pushed unsuccessfully for exemptions from the £25bn minimum size rule where there was deemed to be “no reasonable prospect that consolidation of the scheme into another arrangement would be likely to improve outcomes for members”.
A research report from the Pensions Regulator published in May also urged caution around the scaling up of DC schemes, stating: “There is some evidence emerging of economies of scale benefits, but this is not unequivocal or guaranteed; therefore the market must remain alert and responsive to risks and opportunities. It will take time for UK pensions to build the size and the systems needed to take full advantage of the opportunities of scale.”
