The Government has published a consultation setting out proposals for fundamental changes to the defined contribution (DC) pension scheme market. Most significantly, the Government is planning to legislate for a maximum number and minimum size of DC default funds. The aim is to accelerate a shift to fewer, larger funds in the DC market, which the Government believes will be better placed to invest in the UK economy and deliver greater returns for members.

The consultation closes on 16 January 2025. Following the outcome of the consultation, the Government will decide whether to include the proposed measures in the Pension Schemes Bill. However, in recognition of the significance of the proposed changes, the Government says that the new requirements would not apply before 2030 at the earliest.

What is being proposed?

In relation to authorised master trusts and contract-based workplace pension schemes used for auto-enrolment, the Government is proposing that:

• there should be a maximum number of default funds that each provider may operate – the Government is asking for feedback on the right number (or conditions to limit the number) and what (if any) exceptions there should be; and
• default funds should operate at a minimum size of assets under management (AUM) – the Government is asking for views on what the minimum size of AUM should be, although it notes research suggesting that the benefits of consolidation start to be realised at £25 to £50 billion. The consultation also asks whether any other flexibilities or conditions are needed regarding the minimum size of AUM (e.g. to enable an innovator to provide competitive challenge in the market or in the case of a market shock).

The Government is considering putting in place targets for these schemes to increase their AUM and reduce the number of default funds they operate over the period leading to full implementation in 2030, with progress being monitored by the regulators. Where schemes are unlikely to achieve a minimum size of AUM, it is envisaged that they will consolidate into a receiving scheme, supporting other schemes to meet the scale requirements. 

The consultation expressly confirms that single employer schemes are outside the scope of these proposals, and it appears that connected multi-employer schemes are also out of scope. The Government is asking for feedback on whether there are otherwise in-scope schemes with specific characteristics such that it would be in the public interest for them to be exempted from the proposals.

What else is considered in the consultation document?

As well as the key proposals outlined above, the consultation covers several other topics, including the following:

• Differential pricing: the Government is considering whether it should remove providers' ability of providers to set different prices for the same pension product.
• Contractual override without consent for contract-based arrangements: the Government is proposing to introduce contractual overrides for contract-based pension arrangements, subject to appropriate member protections. This would enable transfers without consent (including bulk transfers) into either trust-based or contract-based arrangements. It is possible that new requirements for receiving trustees may also be introduced.
• The role of employers: the Government is seeking views on proposals to encourage employers to focus on value from their workplace pensions (rather than just costs). These include the possibility of imposing a duty on employers to consider the overall value of the arrangement during scheme selection and regularly thereafter; or imposing a requirement for a nominated executive to have responsibility for ensuring the pension arrangement delivers good value retirement outcomes for staff.
• The role of advisers: the consultation asks whether regulating the advice that employers receive on pension scheme selection would better enable them to consider overall value when selecting a scheme.

The implications for pension schemes

These are significant proposals, with the potential to fundamentally change the DC pensions market in the UK. As the consultation document acknowledges, master trusts and contract-based arrangements vary greatly in size, from tens of millions of pounds in AUM through to around £100 billion. No master trusts have yet reached £50 billion in AUM. The impact on these schemes will therefore be significant, with widescale consolidation likely to follow.

Whether this will achieve the Government’s aims of greater investment in the UK economy and better returns for members is uncertain. The risks of increased consolidation also need to be acknowledged, with the potential for a more concentrated market to stifle competition and innovation and the possibility of increased systemic risk being flagged by respondents to the Government’s earlier call for evidence.

Sponsoring employers of pension schemes should also take note of the proposals to impose new duties on them in relation to scheme selection and outcomes for members.

For more information, please speak to your usual Linklaters contact.