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The future of DC schemes: will you stick or twist?

The future of DC schemes: will you stick or twist?

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The trend towards consolidated defined contribution (DC) schemes continues. Latest figures from The Pensions Regulator show that the number of DC schemes decreased by around 2.5% in 2022. Meanwhile there has been a massive 40% reduction over the last decade, since the start of automatic enrolment in 2012.

The Regulator’s 13th annual DC Trust Report was published on 26th January 2023, showing that at 31 December 2022, there were 26,990 DC schemes compared to 27,700 at 31 December 2021.

The future of DC schemes

Opting to continue to govern an own trust DC scheme certainly has its benefits, but is a huge responsibility. This is especially true now, with increasing governance requirements and in the current economic climate. It is more important than ever to be designing investment strategies which are appropriate, and ensuring that communications go well beyond annual benefit statements.  This is essential for members to fully understand their DC scheme, and therefore be enabled to make informed decisions.

Consolidation clearly isn’t right for all. Many schemes are well governed, and have the resources to access the support they need from their advisers, meaning they can offer good value for their members.   But many are finding it more difficult to continue independently, and are looking to consolidate – either because of the cost of increasing regulation and governance, such as pensions dashboard readiness or following strategic reviews by the sponsoring employer.  Many hybrid schemes, for which DB buy-outs are becoming a reality sooner than expected in the current market, are now re-thinking their DC strategy. This means that even some of the well governed schemes now have consolidation on the agenda. These factors combine with the government’s agenda for consolidation, demonstrated in the extended value for members assessment for smaller DC schemes. It is clear that consolidation is the direction of travel, and will be a key trend in the coming years.

The journey to a successful consolidation

Consolidation involves winding up DC arrangements and moving active members and accrued DC pots to larger schemes. The Government believes that these tend to be better governed and offer better value for money than smaller schemes, and therefore will be in members’ interests. Typically, the chosen destination will be a master trust. The 2023 Regulator’s survey reveals how much DC master trust membership has increased over the last 10 years, from 270,000 to just over 23.5 million at the end of 2022.  The number of authorised master trusts remains consistent at 36, whilst the assets under management increased from £78bn to £105bn over 2022.

Transferring DC assets into an arrangement such as a master trust can be a complex process, and should be planned in detail.  There are some particularly tricky hurdles for hybrid schemes to overcome, with both DB and DC sections.  Things are also more complicated for DC schemes which have any kind of guarantees wishing to transfer their DC benefits to a master trust.

Deciding whether to govern or consolidate is not straightforward. What is clear is that decisions should consider the impact on both scheme sponsors and trustees. Most importantly, they must be centred around members’ best interests.

There are several key areas where schemes will need support and advice for a successful consolidation project:

  • Strategic objectives: Which DC scheme type is the best fit for you and are there any benefit complexities to overcome before the project can commence?
  • Provider selection: Which provider will offer the best value and importantly do you think you can work well with?
  • Communication: Member communications will be critical to ensure compliance with legal requirements, and improve member understanding of the change.  Support will be needed to plan the communication strategy, including how the project can re-engage members with their pension.
  • Transfer of existing funds: How to achieve a successful bulk transfer exercise between schemes, investment managers, and administrators with minimal fuss, delay and risk – whilst negating or mitigating transaction costs for members? This can be a major hurdle requiring planning and support.
  • Winding up. Each scheme is different, and resolving any outstanding liabilities and achieving a successful wind-up of the existing scheme can be complicated.  Where do you access knowledge of the process and technical aspects?

It is clear that consolidation is happening, and likely to continue gathering pace in the coming years. Are you going to stick or twist?