Consultation outcome

Chapter 1: Summary

Updated 21 June 2021

This was published under the 2019 to 2022 Johnson Conservative government

1. This document is the Government’s response to the February 2019 consultation ‘Investment Innovation and Future Consolidation’. It also consults further on changes to regulations and statutory guidance designed to improve DC pension scheme governance, promote the diversification of investment portfolios and signal our commitment to transparent disclosure to scheme members.

2. We address stakeholder responses to the consultation proposal to use increased transparency as a vehicle to further encourage larger schemes to broaden their investments into a range of different asset classes.

3. We address stakeholder feedback on the role the measurement of performance fees and the charge cap might play in limiting the ability of schemes used for Automatic Enrolment default funds to access less liquid investment classes such as venture capital for their members. We consult on a proposed legislative change to the way compliance with the charge cap is measured for performance fees to give trustees greater flexibility in these investment decisions, and we invite views on a proposal to further extend this flexibility with an alternative approach to measurement.

4. We consult on changes to legislation and some new statutory guidance to support and accelerate the process of consolidation in the DC market, and to extend access to a more diverse range of investment classes. Trustees of smaller schemes will be required to assess key elements of the value achieved by their scheme and to report on the outcome of that assessment. Where this assessment shows that members would achieve better value in a larger scheme they are expected to initiate wind up and consolidate.

5. We also consult on other changes to legislation and statutory guidance to improve DC pension scheme member outcomes in response to the February 2019 consultation, and these are set out in more detail in the following pages.

Other related developments

Patient Capital and Authorised Funds

6. The Financial Conduct Authority (FCA) maintained prescriptive diversification rules for retail funds in their Feedback Statement (FS20/2) on Patient Capital and Authorised Funds published in February 2020^{[footnote 2]}. They reiterated the need for such rules to prevent investment concentration risk.

7. Funds structured as Qualified Investor Schemes, however, allow for investments in a wider range of longer term assets, without the same diversification limits as imposed by other retail fund structures, allowing investors to diversify their portfolios when required. The feedback on professional and sophisticated retail investor access to long-term assets through Qualified Investor Schemes found that they are suitable for investment in long-term assets.

Updated Permitted Links Rules

8. The FCA outlined their amendment of COBS 21.3 permitted links rules in a consultation response^{[footnote 3]} in March 2020. The new rules seek to address any unjustified barriers to retail investors investing in a broader range of assets including long-term investments.

9. We are encouraged to see that the FCA’s final set of measures facilitates diversification of portfolios by removing some of the restrictions on investments in illiquid assets, while still preserving a sufficient level of protection for members. This change has the potential to deliver diversified returns to savers while facilitating investment in key assets such as housing, infrastructure, environmental protection and growth companies that lift the whole economy.

Regulators’ joint pensions strategy

10. The FCA and The Pensions Regulator (TPR) continue to develop their joint pensions strategy, first outlined in October 2018^{[footnote 4]}. The focus for the next five to ten years is on determining how to most effectively support different cohorts of scheme members to optimise their retirement savings. This support will involve setting and enforcing clear standards and using a range of regulatory interventions to improve value for money for members.

Charge cap review

11. We are reviewing the scope and operation of the charge cap for Automatic Enrolment default funds and will report towards the end of 2020. The review draws on stakeholder discussions about the operation of the cap as the DC market matures with the aim of ensuring continued financial sustainability for schemes, ensuring trustees are encouraged and enabled to invest in a wide range of assets, including illiquids, while maintaining clear and transparent protection for savers. A call for evidence on specific elements of the charge cap has recently closed and we are analysing the responses together with the data gathered in the 2020 Pension Charges Survey.

List of proposals within this document

Consolidation

Proposed amendments to The Occupational Pension Schemes (Scheme Administration) Regulations 1996 (“the Administration Regulations 1996”), Register of Occupational and Personal Pension Schemes Regulations 2005 and The Occupational and Personal Pension Schemes (Disclosure of Information) Regulations 2013 would:

• require all relevant schemes to report on the return on investments of default and member selected funds
• require schemes with assets below £100 million to report on how their scheme presents value for members taking into account costs and charges, investment returns and various elements of governance and administration
• require schemes with assets below £100 million that do not present value for members to report this outcome in their scheme return
• require all relevant schemes to report to the regulator the total amount of assets held in the scheme in the annual scheme return

We propose to bring these amendments into force on 05 October 2021.

Diversification, performance fees and the default fund charge cap

• amendment to The Occupational Pension Schemes (Charges and Governance) Regulations 2015 (“Charges and Governance Regulations 2015”) to better enable schemes to pay performance fees
• an additional amendment to the Charges and Governance Regulations 2015 to exclude costs of holding ‘physical assets’
• update to charge cap guidance to clarify treatment of underlying costs in investment trusts

We propose to bring these amendments into force on 05 October 2021.

Other changes to legislation

• amendment to The Occupational Pension Schemes (Investment) Regulations 2005 (“the Investment Regulations 2005”) to extend the requirement to produce a default Statement of Investment Principles to ‘with profits’ schemes
• amendment to the Administration Regulations 1996 to extend the costs disclosure requirements to funds which are no longer available for members to choose
• amendments to the Investment Regulations 2005 to exclude wholly insured schemes from some requirements of the Statement of Investment Principles

We propose to bring these amendments into force 05 October 2021.

Updated reporting of costs, charges and other information: statutory guidance

• amendments to the statutory guidance that supports The Occupational Pension Schemes (Administration and Disclosure) Regulations 2018. The amendments provide additional clarity on how costs and charges information should be set out

No changes are proposed to the regulations themselves.

1. Patient Capital and Authorised Funds - Feedback on DP18/10 ↩

2. FCA Amendment of COBS 21.3 permitted link rules - final rules and feedback to CP18/40 ↩

3. FCA and TPR joint strategy, October 2018 ↩