• The Department for Work and Pensions (DWP) has today set out its latest thinking on driving greater value in workplace pension schemes (Government Response: Improving outcomes for members of defined contribution pension schemes (publishing.service.gov.uk))
• Small schemes with total assets of £100 million or less will need to carry out extra value for money checks and report the outcome of this assessment to the regulator
• Where trustees conclude their scheme does not provide good value for members, either immediate improvement or consolidation could be necessary
• The Government is also seeking to encourage more schemes to invest in illiquid assets within the charge cap by allowing performance fees to be smoothed over a five-year period
• In addition, all relevant schemes will be required to publish investment returns net of charges for default and ‘self-select’ funds
Tom Selby, senior analyst at AJ Bell, comments:
“The DWP’s latest salvo in the workplace pensions market squarely targets value for money, although from two very different perspectives.
“Firstly, the Government is ramping up pressure on smaller schemes with assets of £100 million or less to demonstrate they are providing value for money to members.
“This additional reporting requirement is designed so trustees ask tougher questions about the ability of a scheme that has not reached scale to deliver comparable value for money compared to larger schemes.
“Secondly, the Government is keen for pension schemes to help drive investment in less liquid assets such as private equity funds. As part of this, it has decided to allow pension schemes to smooth performance fees often associated with such funds over a five-year period – thus potentially allowing more schemes to invest in such assets within the 0.75% charge cap.
“The argument here is that pension scheme trustees should choose investments based on their potential long-term value to members, and that the difficulty fitting performance fees within the charge caps risks putting schemes off illiquid assets.
“This comes alongside requirements for schemes to publish net investment returns to their members.
“While it is positive the DWP is explicitly recognising that value for money is about more than just charges, it is vital schemes continue to keep costs as low as possible.”
