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DC schemes: value for members in “small” schemes and investment return reporting

  • United Kingdom
  • Pensions


The Government has issued a response to consultation and further consultation on a number of issues that will affect DC schemes from 5 October 2021. The two main points to be aware of are:

  • trustees of DC schemes with assets of less than £100 million, that have been operating for at least 3 years, will need to carry out a new annual value for members assessment and – where the scheme does not provide value - to consider winding it up
  • trustees of all DC schemes will need to report on net investment returns in the chair’s statement

As it is just over a year before these changes are planned to become law, schemes need to start thinking now about what actions they will need to take, particularly where a value for members assessment will be required.

Investment returns

The Government proposes to require all DC schemes to report on the return (net of charges and transaction costs) on any default funds and any funds selected by members in which assets were invested during the year. This information will need to be published in the annual chair’s statement for the first scheme year ending after 5 October 2021.

Draft statutory guidance sets out exactly what information will need to be reported. In particular, it says that returns should be shown for a £10,000 lump sum investment and should, where possible cover at least the period from April 2015 (or longer if data is available). Guidance is also given on how the information should be presented.

Consolidation and value for members

Of the 3000 DC schemes registered with the Pensions Regulator, 1300 have fewer than 12 members and 2150, fewer than 100 members. Data shows that smaller schemes are significantly less likely to meet the governance requirements expected by the Regulator and that members of smaller schemes are likely to be paying higher charges than those in larger schemes (nearly double in many cases).

Value for members assessment

To address these concerns, the Government is proposing that new legislation will come into force on 5 October 2021 which will require trustees of DC schemes that have been operating for at least 3 years and have assets of less than £100m to carry out a new value for members assessment. In determining whether a scheme has assets below the threshold, it seems from draft regulations that in the case of a hybrid scheme, DB assets may be able to be taken into account.

When carrying out the assessment, trustees will be required to consider 3 areas:

  • charges and transaction costs borne by members
  • the net returns on investments
  • administration and governance

Carrying out the assessment

The assessment will need to be carried out annually and the Government has issued draft guidance that trustees will need to have regard to.

It is proposed that costs and charges and net investment returns would need to be assessed relative to those of at least 3 other larger DC schemes (with £100m+ of assets). Trustees will be expected to have a clear rationale for the comparator schemes they choose and they must have reasonable grounds to believe that at least one would be willing to accept a transfer of the assets and liabilities of their scheme if it was wound up.

The comparison should be fairly easy in relation to charges as schemes have published relevant data for some time. However, as the requirement to publish investment data is new, the guidance recognises that it may not be publicly available in the short term and therefore for the first assessment trustees can “ask advisers or dedicated service providers for data from other pension schemes they advise. Alternatively, they can use commercially published sources of data”.

Administration and governance standards will not need to be compared to other schemes. Trustees will need to take into account factors including the quality of scheme governance, the quality of record keeping, promptness and accuracy of core financial transactions, communications with members, investment governance, management of conflicts and how well the statutory requirements in relation to trustee knowledge and understanding are satisfied. The draft guidance sets out what trustees should consider in relation to each metric when assessing value for members.

Outcome of the assessment and reporting

The outcome of the assessment will need to be reported on in the chair’s statement with the first assessment being included in the chair’s statement published for the first scheme year ending after 5 October 2021. Trustees will need to explain how the scheme delivers value in all three areas set out above and should not give excessive weighting to costs and charges.

If the trustees consider that the scheme is not delivering good overall value, they are expected to carefully consider winding-up the scheme and transferring the assets and liabilities to a larger arrangement. If they are realistically confident that improvements can be made, or wind-up costs are likely to exceed the costs of making such improvements, or there are valuable guarantees that would be lost on consolidation, and it would be in the interests of the members, the trustees can try to make appropriate changes instead of winding the scheme up. However, if improvements are not made within a reasonable period, it is still expected that the scheme will be wound-up.

The Pensions Regulator

Information about the assessment will also need to be provided to the Regulator in the annual scheme return. Where the trustees concluded that the scheme does not provide value, they must also disclose whether they intend to wind up the scheme. If they are not proposing to do so, they must explain why not and what improvements they are planning to make.

The Pensions Regulator already has powers to wind-up schemes under the Pensions Act 1995 in a number of circumstances including where “it is necessary in order to protect the interests of the generality of the members”. If appropriate action is not taken by trustees in relation to a scheme which is not providing value for members, the Regulator will therefore be able to intervene and order the scheme to be wound-up.

Other issues

It is worth noting that the response to consultation covered other areas, including:

  • some changes to the charge cap which applies to default funds used for auto-enrolment to facilitate the use of performance fees in some cases. Guidance will be updated to clarify that the cap does not apply to costs associated with holding physical assets such as property
  • confirmation that the Government is not proceeding with proposals to require larger DC schemes to report their policy in relation to illiquid investments

Next steps

The changes are planned to take effect for scheme years ending after 5 October 2021.

The value for members assessment will require trustees to do significant additional work. Therefore trustees of arrangements that provide DC benefits should consider now whether their schemes are likely to be in scope and begin to plan for the work required.

Trustees of all DC arrangements also need to identify if they already have the information in relation to net investment returns and, if not, talk to investment managers about whether and when it can be made available.