In September last year, the UK pensions regulator opened consultation on plans to force sub-£100 million workplace pension schemes to justify their existence
The UK pension sector is experiencing similar pressure to that being felt by Australia’s super funds, with the pensions regulator asking defined contribution (DC) funds with less than £5 billion in assets being urged to merge.
In September last year, the UK pensions regulator opened consultation on plans to force sub-£100 million workplace pension schemes to justify their existence. From October this year, these plans must pass a series of value-for-member tests. If they fail the tests and fail to take immediate action, they will be forced to wind up and merge with a larger scheme.
While they won’t be subjected to the same tests, pressure to consolidate is set to be expanded to schemes of up to £5 billion in assets. The pensions regulator is looking at Australia as an example of why consolidation is needed, having met with Australian government officials to discuss the benefits of consolidation.
It is the case that consolidation in Australia has led to fewer, larger schemes and lower charges and more diversified investment portfolios. However, the average charge in the UK is significantly lower than other countries meaning there may be less scope for UK DC schemes to reduce charges by the same extent as a result of consolidation, the Department for Work and Pensions said.
It also noted that international evidence shows larger funds often have more diversified investments but does not demonstrate a clear link between fund size and returns.
Still, minister for pensions Guy Opperman said: There is no doubt in my mind that there must be further consolidation in the occupational defined contribution (DC) pensions market. This is the direction of travel.
We know from other countries such as Australia that scale is the biggest driver in achieving value for money for savers and ultimately better retirement outcomes, he said. Further consolidation will drive better outcomes for members through better governance and greater investment in illiquid assets.
Opperman has called his evidence on the barriers and opportunities for greater consolidation of funds with between £100 million and £5 billion. He has also flagged that schemes with more than £5 billion will eventually be scrutinised.
It is not my intention to stop at £5 billion but given the present size of the UK market, this is the appropriate cut off- for now. I strongly encourage views for this call for evidence to help shape further policy on consolidation in the DC market, he said.