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Smaller DC schemes urged to show they offer value or wind up

Ref: PN22-19

Issued: Thursday 30 June 2022

Trustees of smaller defined contribution (DC) pension schemes should ensure they are ready to meet new regulatory requirements after a survey suggested many are lagging behind.

Results from The Pension Regulator’s (TPR) annual survey of DC pension schemes conducted from October to December last year, published today (Thursday), show trustees of most schemes with fewer than 100 members are unaware of their duties in relation to new, more detailed value for members assessments. 

This is despite reminders from TPR last year and the publication of updated guidance to help trustees prepare for the new assessments.

The survey also found that only a few smaller schemes are devoting time or resources to climate-related issues and 43% of micro and 31% of small schemes admitted they were unaware of TPR’s codes of practice or had never used them. 

Value for members

Regulations require DC trustees with less than £100 million of assets under management to compare their scheme’s costs, charges and investments returns against three other larger schemes. They must also carry out an assessment of their scheme’s governance and administration in line with seven key metrics. Schemes must carry out this more detailed value for members assessment at every scheme year end after 31 December 2021.

The outcome of this assessment must be reported in their annual chair’s statement and the findings provided to TPR in their scheme return.

However, TPR’s survey showed that two-thirds of schemes with less than £100 million in assets under management were unaware of the new requirements.

Of those that were aware of the regulations, just over of half (51%) had carried out an assessment of the scheme’s governance and administration and few had compared net investment returns or costs and charges with three other schemes (17% and 10% respectively). 

David Fairs, Executive Director Regulatory Policy, Analysis and Advice at TPR, said: “No saver deserves to be left stuck in a small, poorly governed scheme which doesn’t offer the same value as a larger one. Sadly, our survey shows this remains the reality for some savers, which strengthens our belief that consolidation is the answer for many small schemes. 

“Where trustees of smaller schemes can’t show that they provide this value, we expect them to either wind up or take prompt action to make improvements.”

Climate inaction

From October last year, trustees of certain schemes faced new requirements intended to improve the quality of governance and reporting as they address climate-related risks and opportunities.

The new rules initially applied to authorised schemes and those with relevant assets of £5 billion or more. However, it will also apply to schemes with relevant assets of £1 billion or more from 1 October 2022.

Results from the DC survey show smaller DC schemes are far behind larger ones in allocating time or resources to assessing financial risks and opportunities relating to climate change.

Whilst every master trust and nine in 10 large schemes had allocated time or resources to assessing financial risks and opportunities associated with climate change, this fell to just over half of medium schemes (55%), fewer than one in 10 small schemes (9%) and just 5% of micro schemes. 

Mr Fairs added: “All pension schemes, regardless of size, are very likely exposed to climate-related risks and opportunities. 

“Trustees shouldn’t wait for legislation to act. In managing risks effectively, all trustees should explore how climate change might affect long-term investment goals, their employer covenant and the opportunities that will come from a global pivot towards low carbon economies.”  

Codes of practice

The survey also showed that 43% of micro and 31% of small schemes were either unaware of TPR’s codes of practice or had never used them. 

Smaller schemes were also less likely than larger schemes to be aware that TPR’s codes of practice are due to be replaced by a single code of practice. 

According to the data, only 20% of micro and 28% of small schemes reported they were aware of the upcoming single code, which aims to improve scheme governance by being easily accessible and providing a more concise set of expectations for those involved in running all types of scheme.

Mr Fairs said: “Good governance is key if trustees are to achieve good member outcomes. Being aware of codes relevant to them and following them is a very basic expectation on trustees of any scheme regardless of size. 

“If trustees cannot meet this very basic standard, they should consider winding up and consolidating savers into a better-run scheme.”  

Notes for editors

  • The survey defined a micro scheme as having fewer than 12 members and a small scheme as having 12 to 99 members.
  • The annual survey of trust-based occupational DC pension schemes was carried out between 7 October and 10 December 2021. The survey was made up of telephone interviews with trustees, secretaries to the board of trustees, scheme managers, in-house administrators or external advisers involved in running the scheme who managed 305 schemes of differing sizes including 21 master trusts. 
  • The survey suggested DC trustees were at risk of not being sufficiently prepared for their pensions dashboards deadline. According to the survey, 51% of DC schemes continued to hold at least some member records non-electronically, this included one-fifth (20%) of schemes with 100 or more members. Just under one-quarter (23%) of the schemes with 100 or more members who held at least some member records non-electronically had begun to digitise the information they held, even though they will be the first to connect to pensions dashboards. And only 37% of DC schemes with 100 or more members had discussed pensions dashboards at their scheme’s trustee board meeting, with only a similar proportion (44%) of such schemes having engaged with their administrator about their scheme’s data. TPR has launched its Deadline campaign warning trustees they must start preparing for their pensions dashboards deadline along with new dashboards guidance outlining what they must do and by when.
  • DC trustees can find guidance on value for members assessments and winding up on TPR’s website.
  • TPR published its climate change guidance describing what trustees need to do and report on to comply with the new, climate-related regulations, last December. It gives practical examples of how trustees might seek to comply with the regulations. This February, it also published a step-by-step example charting how the trustees of the fictitious XYZ pension scheme might approach meeting the requirements of the new climate-related regulations. Those running schemes out of scope of the rules but who want to do more to manage climate-related risks and opportunities may find the example and final guidance helpful. TPR is also asking trustees of schemes in scope, or coming into scope, of the regulations to complete a short anonymous survey to gauge their confidence in meeting the requirements.  
  • In spring 2021 TPR consulted on a new code of practice bringing together 10 of its existing codes of practice into a single code. The new code provides one source of clear and consistent information on scheme governance and administration. We published an interim response to the consultation last August. 
  • The Pensions Regulator is the regulator of work-based pension schemes in the UK. Our statutory objectives are: to protect members’ benefits; to reduce the risk of calls on the Pension Protection Fund (PPF); to promote, and to improve understanding of, the good administration of work-based pension schemes; to maximise employer compliance with automatic enrolment duties; and to minimise any adverse impact on the sustainable growth of an employer (in relation to the exercise of the regulator’s functions under Part 3 of the Pensions Act 2004 only).

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