DC Consolidation: A deep dive into the new "Value for Members" annual review requirements

United Kingdom

The DWP has issued guidance on the new “Value for Members” assessment requirements under the Occupational Pension Scheme (Administration, Investment, Charges and Governance) (Amendment) Regulations 2021. The new requirements are part of the Government’s focus on consolidation of smaller DC schemes and reflect their view that members should be in well run schemes that deliver optimal value for members over the long term. If a scheme cannot demonstrate good value for members, trustees should consider winding up and transferring the members’ rights to another scheme that does offer good value.

Requirements for relevant pension schemes

From 1 October 2021, all relevant pension schemes (which includes most defined contribution and hybrid pension schemes) must calculate and state the return on investments in addition to net transaction costs and charges. This assessment must be published on the scheme’s website and included in the first chair’s statement prepared for the first scheme year that ends after 1 October 2021. 

Requirements for specified pension schemes

From 1 October 2021, there will also be additional value for member requirements for ‘specified schemes’ which are relevant pension schemes that have been running for more than 3 years and have less than £100 million total scheme assets. This value for member assessment includes:

  1. A comparison of charges and transaction costs with 2 comparator schemes;
  2. A comparison of net investment returns with 3 comparator schemes; and
  3. A self-assessment of the scheme’s governance and admin criteria.

The assessment of charges and transaction costs and net investment returns requires specified schemes to compare their value for members against a comparison scheme. A comparison scheme is an occupational pension scheme with £100 million assets or more, or a personal pension scheme which is not an investment regulated pension scheme. Trustees are expected to have a clear rationale for the schemes chosen as comparators and should include a scheme different in structure to their own where possible.

Trustees must also have discussions with at least one of their comparator schemes about a transfer of the member’s rights should their scheme be wound up.

Specified schemes must carry out the assessment for the first scheme year ending after 31 December 2021 and include the assessment in the Chair’s Statement, publish it on their website and report it to TPR via the annual scheme return.

How does a specified pension scheme demonstrate value for members?

The DWP guidance sets out how a specified scheme should demonstrate value for members under each stage of the assessment.

When comparing charges and transaction costs, good value for members will be evidenced by a majority of total charges and transaction costs across popular funds being closely comparable with or lower than the average for comparator pension schemes. Good value for members could also be evidenced if higher charges are justified by higher investment returns.

Net investment returns with good value for members are demonstrated by greater or closely comparable net return figures when compared with the average of comparator funds. Where a clear majority of net performance figures for a particular fund are worse than the average of comparator funds, this indicates poor value for members.

Trustees must assess the value delivered by their governance and administration offering as part of their assessment, using the following 7 key metrics:

  1. Promptness and accuracy of core financial transactions
  2. Quality of record keeping
  3. Appropriateness of the default investment strategy
  4. Quality of investment governance
  5. Level of trustee knowledge, understanding and skills to properly exercise their functions and operate the pension scheme effectively
  6. Quality of communication with scheme members
  7. Effectiveness of management of conflicts of interest

When weighing up the 3 areas of the value for members assessment, the guidance notes that trustees should not focus on the charges and transaction costs of the scheme but instead place more emphasis on the scheme’s net investment returns and governance and administration. If charges and transaction costs are significantly higher than those that can be achieved in the market and there is no material difference in governance or investment return, the scheme is unlikely to have value for members.

Action following the Value for Members assessment

If the Value for Members assessment demonstrates that the scheme does not provide value for members, the trustees should consider winding up the scheme or take action to improve the existing scheme immediately after the Value for Members assessment takes place.

If the trustees decide to wind up the scheme, the rights of the members should be transferred into a larger occupational pension scheme or personal pension scheme. The costs of winding up the scheme and transferring members rights from a scheme should be considered by the trustees when considering the best course of action after the Value for Members assessment.

If trustees decide to improve the existing scheme instead of winding up the scheme, trustees should state their reasons for doing so in the annual scheme return and detail the steps they are taking to ensure the scheme does deliver value for members. If the value for members is not improved within a reasonable period, trustees are expected to then wind up the scheme. The Pensions Regulator can use its existing powers to intervene and force a wind-up of the scheme and/or remove and appoint trustees if it determines that the correct action is not being taken following the Value for Members assessment.

What’s next?

In the summer the DWP published a call for evidence on barriers to further consolidation of medium and large DC schemes (with assets between £100m and £5bn).  It is anticipated that the Value for Members assessment may be adapted and rolled out to medium and large schemes in the near future.