DC pension schemes – new charging and disclosure requirements and further proposed reforms

The government has laid regulations before Parliament that introduce a range of previously announced proposals affecting occupational pension schemes that provide DC benefits other than additional voluntary contributions (“relevant schemes”). The regulations exempt certain performance fees from the DC default fund charge cap and introduce new disclosure requirements in relation to performance fees, investment in illiquid assets and asset allocation. The government has also responded to its consultation on a draft version of the regulations and published statutory guidance on the new requirements.

The government has also announced proposals for a range of reforms affecting relevant schemes. The proposals cover a new value for money (“VFM”) framework, automatic consolidation of small deferred DC pots and extension of the collective DC (“CDC”) regime.

Changes in force from 6 April 2023

The regulations amend the definition of “charges” for the purposes of the DC default fund charge cap to exclude certain specified performance fees.

In addition, the regulations require trustees of relevant schemes that are being used for automatic enrolment to carry out an annual calculation of any specified performance fees incurred in relation to the scheme’s default arrangement(s) during scheme years ending after 6 April 2023 and assess the extent to which those fees represent good value for members. They must also set out the amount of any specified performance fees incurred in relation to the default arrangement(s) in the chair’s annual governance statement (“chair’s statement”) for scheme years ending after 6 April 2023. That section of the statement must be published on a website that is publicly available free of charge.

Identical requirements apply for CDC schemes that are being used for automatic enrolment (“qualifying CDC schemes”), but with regard to any specified performance fees incurred in relation to the entire scheme during the scheme year as CDC schemes do not have default arrangements.

Changes in force from 1 October 2023

Investment in illiquid assets

The regulations require trustees of relevant schemes to include their policy in relation to investment in illiquid assets in the statement of investment principles (“SIP”) for the scheme’s default arrangement. Identical requirements apply to qualifying CDC schemes, but in relation to the main scheme SIP.

Trustees must comply with these requirements from the earlier of (a) the first occasion that the default arrangement SIP (or the main SIP for qualifying CDC schemes) is updated after 1 October 2023 and (b) 1 October 2024.

Asset allocation

The regulations require trustees of relevant schemes to carry out an annual calculation of the percentage of assets in the default arrangement(s) allocated to each of the following asset classes in scheme years ending after 1 October 2023:

1. Cash.
2. Corporate bonds, UK gilts and bonds issued by non-UK governments.
3. Listed equities.
4. Unlisted equities.
5. Infrastructure.
6. Property/real estate.
7. Private debt.
8. Any other assets.

The results of the calculation must be included in the chair’s statement for scheme years ending after 1 October 2023. That section of the statement must be published on a website that is publicly available free of charge.

Identical requirements apply to trustees of qualifying CDC scheme, but again in relation to all scheme assets.

Future reforms – new VFM framework

The government, the Pensions Regulator (the “Regulator”) and the Financial Conduct Authority (the “FCA”) are consulting on a new VFM framework for relevant schemes and workplace personal pension schemes under which schemes will be required to disclose, assess and compare the VFM that they provide. The framework is intended to improve retirement outcomes by providing a standardised understanding of VFM, allowing increased transparency, comparability and competition. The intention is that the new framework will ultimately replace both the current value for members requirements that apply to all relevant schemes and the more detailed value for members requirements that were introduced in October 2021 for relevant schemes with less than £100 million in assets.

The proposed framework will cover three key areas:

• Investment performance.
• Costs and charges.
• Quality of services – specifically member communications, promptness and accuracy of core financial transactions and quality of record-keeping.

Schemes will be required to report on a range of metrics in relation to these three areas and to use this data to assess the VFM that they offer when compared to the market. The consultation proposes two potential comparison approaches:

• Comparison against Regulator/FCA-defined benchmarks.
• Comparison against a sample of other schemes in the market using a mandatory step-by-step approach.

Following the assessment, schemes would be required to conclude whether they (a) provide VFM, (b) do not currently provide VFM, but have identified improvements that would deliver VFM, or (c) do not provide VFM. The consultation considers various options for mandating action in the event that a scheme does not deliver VFM, including giving the Regulator powers to enforce wind-up and consolidation.

Schemes will be required to publish their VFM data by the end of Q1 each year and to publish their VFM assessment in October each year, in both cases regardless of their scheme year end date. The VFM assessment will not therefore form part of the chair’s statement for relevant schemes, but will be included in the independent governance committee chair’s report for workplace personal pension schemes.

The consultation proposes a phased approach to introduction of the new framework, with it applying initially to default arrangements (including in legacy schemes), other than those with very small numbers of members or assets under management below a particular threshold. The test for a default arrangement will be the same as for the DC default fund charge cap.

The consultation also looks at the future role of the chair’s statement. A 2021 review of the statutory chair’s statement requirements noted that it is a multi-purpose document for two different audiences – members and the Regulator. The government is therefore considering splitting the requirements into two separate documents, one that is member-facing and another that is purely a governance document.

Future reforms – automatic consolidation of small DC pots

The government has published a call for evidence on policy options for automated consolidation solutions to address the growth of deferred small DC pots. The call for evidence proposes two options:

• A default consolidator model – Under this model, deferred pots which meet the chosen eligibility criteria for automatic consolidation would transfer automatically to a small pot consolidator, with members being given an opportunity to opt out.
• A “pot follows member” model – Under this model, when an employee moves jobs their deferred pot in their former employer’s scheme would automatically move to their new employer’s scheme if it meets the chosen eligibility criteria for automatic consolidation. Individuals would have the opportunity to opt out.

Future reforms – extension of the CDC regime

The government is consulting on policy proposals for extending the CDC regime to allow the establishment of:

• Non-associated multi-employer CDC schemes – currently only a single employer or a group of connected employers (e.g. members of the same corporate group) can establish a CDC scheme.
• Decumulation-only CDC schemes – members would transfer to the scheme at the point of decumulation with their pension pot. The value of their pot at that time would determine what pension income the member might receive from the scheme. Such schemes could potentially improve member choice and outcomes in the existing DC decumulation market.

Next steps

Trustees of relevant schemes will need to make arrangements to comply with the reforms coming into force from April and October 2023. They must have regard to the statutory guidance when complying with the requirements on performance fees and asset allocation.

The consultations on the new VFM framework and extension of the CDC regime and the call for evidence on automatic consolidation of small DC pots all close on 27 March 2023.