Proposed reforms to defined contribution pension schemes

The key proposals include:

• 1. Encouraging Consolidation: stricter rules and requirements for DC pension schemes to demonstrate value for members, potentially accelerating mergers into larger and better performing schemes.
• 2. Default Funds: a maximum number of default funds that each funder may provide, and they should operate at a minimum size of assets under management (AUM). Single employer schemes and connected multi-employer schemes are outside the scope of these proposals.
• 3. Fee Structures: removing providers’ ability to charge different prices for the same products.
• 4. More Involvement for Employers: encouraging employers to shift their focus to the value of the pension products of their workplace pensions rather than the cost of the schemes. The Government has considered whether this will involve imposing a duty on employers to consider the overall value during a product selection process or requiring a person to be nominated to ensure that the pension product delivers a good value retirement for its staff.
• 5. Contractual Override: contractual overrides for contract-based pension arrangements. These overrides would allow transfers into either trusts or contract arrangements without member consent. This is intended to enable the automatic consolidation of millions of deferred small pots into a small number of high-quality arrangements, helping to protect members from the risks that multiple deferred pots present. There are issues however, for example, where members have guaranteed annuity rates, as it may not be in those members’ interests to transfer their savings. In the context of trust-based schemes, disgruntled members have a right to legal recourse against trustees if they are moved without consent, they are worse off and the decision to transfer was made negligently. The Government is seeking feedback on how those safeguards work and whether they should be applied in the context of contract-based schemes.
• 6. Advisers’ roles: the consultation considers regulating the advice provided to employers regarding pension schemes to allow them to make a more informed decision of the overall value of a pension product when selecting a scheme.

What’s next?

Some commentators say that the Government’s aim for increased consolidation creates a risk of a concentrated pensions market that may stifle competition. This leads to uncertainty as to whether the proposed changes will meet the Government’s aim for increased investment in the UK and allow better returns for pension scheme members.

The consultation closes on 16 January 2025. However, the Government has indicated that any reforms, if they proceed, will not apply until at least 2030.