Data analysis: The total membership of small schemes with between two and 11 members has fallen by two-thirds over recent years as the market consolidates and auto-enrolment beds in.
The data from the Office for National Statistics showed micro schemes currently make up 80 per cent of all private sector occupational pension provision. Yet in the eight-year period to 2012 the overall number of members fell to just 100,000 from around 300,000.
We do not consider that small and medium schemes will normally be suitable for auto-enrolment
The government recently expressed a desire to see the number of UK pension schemes reduced, in part to help drive up the overall quality of defined contribution schemes, but has stopped short of legislating to achieve this.
A spokesperson for the Department for Work and Pensions said: “While there is no case for government to actively intervene and condense [the number of] very small schemes, there are benefits to be had in terms of value for money from greater scale.”
The government is also taking forward proposals for minimum quality standards across all DC workplace schemes and consulting on proposals for a charge cap.
Brian Henderson, partner at consultancy Mercer, said the pressure on charges will be the catalyst that slims this segment of the market further.
“These are the ones that will have been given terms that are not uncompetitive but relative to their bigger brothers will be poor a relation,” he said.
He added that the challenge will be when these “tiddlers” go through auto-enrolment. “I think it’ll be a real strain on providers to be able to support these micro schemes, if indeed they actually offer terms on them,” he said. “But there has to be a home for them so someone will sweep them up.”
Impact on auto-enrolment
The ONS figures estimated that the number of private sector micro schemes in the UK in 2012 stood at 35,610, of which 20,600 remained open.
The Pensions Regulator said micro funds largely comprise small self-administered schemes and other arrangements aimed at executives or high-net-worth individuals, and signalled that it will indirectly drive employers towards larger schemes to deliver auto-enrolment.
“We do not consider that small and medium schemes will normally be suitable for auto-enrolment, and our communications to employers will steer them towards high-quality schemes more likely to benefit from economies of scale and good governance,” a spokesperson said.
The regulator said it is currently working closely with the DWP and Financial Conduct Authority on how best to approach the stock of legacy DC schemes.
It added that its main focus for such micro schemes will be to “protect members from fraud and malfeasance”, working closely with HM Revenue & Customs to monitor this.
“We expect all schemes to meet the expectations of our DC code and guidance, regardless of their size,” the spokesperson said.
But Nicola Rondel, of counsel at law firm Hogan Lovells, said directors could arguably be “missing a trick”, as SSASs can lend to the sponsoring company up to 50 per cent of funds held.
This means such arrangements could be used to improve the health of small companies at a time when bank lending is scarce. “You can meld your pension and the livelihood of your company somewhat,” she added.
But Rondel warned that trustees and company directors are also scheme beneficiaries, “so they need to be careful that they don’t blur their roles and that there are no conflicts of interest when they’re making a decision about the trust assets”.
“They have to be very conscious that they’re wearing their trustee hat,” she said.
