UK workplace pension schemes with assets of up to £5bn will face pressure to merge under government plans to unlock billions of pounds of retirement cash to stimulate the economic recovery and improve outcomes for savers.
The government announced plans last year to subject defined contribution pension schemes with assets of up to £100m to tough value-for-members tests to “justify their continued existence”.
Trustees of schemes that fail the test will, in most circumstances, have to take immediate steps to wind up the plan and transfer the members and their benefits into a larger scheme.
Guy Opperman, pensions minister, on Monday announced he wanted to go “further and faster” by possibly extending the tests to schemes of up to £5bn in assets, among a series of options to drive consolidation in the sector.
“We know from other countries such as Australia that scale is the biggest driver in achieving value for money for savers and ultimately better retirement outcomes,” Opperman said when unveiling a consultation on the proposals.
“Further consolidation will drive better outcomes for members through better governance and greater investment in illiquid assets.”
Illiquid assets are investments that are not easily tradeable, such as property, or wind farms.
Since 2012, the number of defined contribution schemes in the UK, where the size of the retirement pot is not guaranteed, has grown to 1,500. The expansion has been driven by government policy which has seen more than 10m workers automatically enrolled into company retirement plans by their employers.
The government on Monday also invited views on how to “incentivise” mergers of the hundreds of schemes with assets of between £100m and £5bn
Opperman said there were “fantastic opportunities” for larger and better governed schemes to invest in the UK; in innovation, infrastructure and clean growth — underpinned by the UK’s net zero emissions ambitions.
“By not consolidating quickly enough schemes will not have the capability to grasp these opportunities with both hands,” said Opperman in a consultation document published on Monday.
“It is important that they move more quickly. This will ensure savers do not miss out but this will also help the UK build back better.”
Another option floated in the consultation, which will run for six weeks, was to give “greater” powers for The Pensions Regulator to act where it has “evidence of poor governance/performance”.
Industry experts said the government may look to force mergers if nudge tactics prove ineffective.
“Forcing scheme closures might be an outcome,” said Joe Dabrowski, deputy director, policy, with the Pensions and Lifetime Savings Association, which represents 1,300 workplace pension schemes.
“If the intention is to speed up consolidation, and the nudges that have been introduced at the lower end of the market don’t work, then they will need stronger means to get mergers moving faster.”
The government said it was asking industry to work with it and was open to solutions that would improve member outcomes.
The plans to create mega pension pools were published on the same day that the government announced it was pushing ahead with proposals to loosen, from October, a charge cap that workplace pensions pay fund managers. This should allow greater investment by trustees in sectors such as private equity, which levy performance fees.
Expanded investment by private equity and venture capital in innovative businesses is seen as vital to helping the nation’s economic recovery.