Government plans to push ahead with small scheme consolidation

A consultation paper on a charge cap for auto-enrolment was published by the Department for Work and Pensions last week. While ostensibly unrelated, one paragraph in the paper has a bearing on consolidation.

“The government remains committed to protecting scheme member outcomes and ensuring the pension market works,” the paper read. 

“We have taken measures to streamline the process of consolidation and made it easier for schemes unable to secure value for money in the long term to exit the market and secure a better deal for their members elsewhere.” 

It continued: “We are also planning to consult on regulations to encourage smaller schemes to consider consolidation where this would offer better value to their members.”

LCP partner Steve Webb argued that, once the principle is accepted, it could easily be applied to defined benefit schemes as well.

Small scheme consolidation has long been on the DWP’s agenda. Pensions Expert reported in March on a speech given to the Pensions and Lifetime Savings Association by pensions minister Guy Opperman, in which he spoke of his preference for a selection of providers with large multibillion-pound portfolios, which could exercise greater collective bargaining power than a menagerie of small, self-administered schemes.

“Improved scale and improved choice will drive better returns,” the minister said. “I’m looking forward to bringing forward regulations for consultation in the spring to nudge these schemes towards consolidation, and be in no doubt that consolidation is what we’re going to try to do.”

While specific details are scarce, one possible way the government might use regulatory pressure to push for the change is outlined in a 2019 consultation paper on defined contribution investments and consolidation, in which it is suggested that a chair’s statement could be made to include that it has considered questions of scale once every three years.

Specifically, a chair’s statement may have to specify that it believes the current scale of the scheme provides best value for members. Should the chair be unable make that case, they may be forced to consider consolidation options such as master trusts.

Commenting on the report, Sir Steve said: “The government has clearly been encouraged, by the success of the master trust process, to believe that regulatory action can help to drive consolidation.

“While size is not always a guarantee of quality, there is no doubt that scale can bring efficiencies, and requiring schemes to consider if their current scale offers best value to members would be a step in the right direction.”

He added: “If the government presses ahead with these measures for DC schemes, a similar approach for DB cannot be far behind.”