Consultation outcome

Ministerial foreword

Updated 21 June 2021

This was published under the 2019 to 2022 Johnson Conservative government

The government has an aspiration that all Defined Contribution (DC) scheme members should benefit from efficient and operationally resilient administration, first class investment governance, and access to innovative and diversified investment strategies. I want all scheme members to benefit from a broader range of assets to improve the returns they achieve, and to drive new investment in important sectors of the economy.

The UK has a world-class occupational pension system and the market is continuing to consolidate and to innovate in the interests of scheme members. But, there remain large numbers of smaller DC schemes many of which are poorly governed, have on average higher charges and do not have the scale to bring the benefits of investing across a broad range of asset classes.

I am determined to do more to ensure the Trustees of smaller schemes act in the best interests of their members. I am therefore bringing forward measures that will ensure that we tackle persistent underperformance and poor governance by accelerating the pace with which the market is consolidating. This will bring the benefits of scale to all scheme members including a greater capacity to take advantage of illiquid and other alternative investment classes.

The measures I am bringing forward in these draft regulations and statutory guidance clarify and strengthen what trustees must consider when assessing the value for members their scheme delivers. Schemes with total assets of less than £100 million are required to assess the value they offer their members in a more holistic way.

Small schemes that are well run and offer superior benefits, as well as the larger schemes under this threshold that are performing well, are likely to be able to demonstrate they offer value in the way we set out. Where smaller schemes are not able to demonstrate value for members, Government’s expectation is that they consolidate into a larger scale scheme that is able to provide better outcomes for those members.

Trustees’ fiduciary duties require them to take account of all long term financially material considerations when deciding their investment policy. It remains Government policy not to direct the trustees of private trusts to invest in a particular way. As part of that, it is also Government’s policy to ensure it is not putting up unnecessary or inadvertent obstacles to trustee decisions where these would limit trustees’ ability to take full advantage of the broad range of asset classes available to them.

I am aspirational about ensuring schemes are able to invest in a broad range of assets such as technological, social and environmental infrastructure, and welcome the continued growth of investment in these assets by pension schemes. The government could not be clearer in its support for pension funds investing in such products as part of a balanced portfolio. We thank all those who contributed to the consultation, and who have shaped the debate on these issues.

I set out measures to address issues raised with us in relation to illiquid investments such as venture capital and the charge cap on the default fund. I am enabling schemes to smooth the calculation of performance fees in year, which will remove potential barriers to these illiquid investments while ensuring members remain protected. I also announce my intention to create a further, multi-year smoothing option for the calculation of performance fees to facilitate access to less liquid assets such as venture capital. I am placing the fixed costs of investments on a statutory footing and have clarified issues around the definition of administration charges in the forthcoming Pension Schemes Bill.

These measures, together with the recent amendment to the Financial Conduct Authority’s rules^{[footnote 1]} on permitted link funds, seek to address any unjustified potential regulatory barriers to investment in some less liquid assets.

I believe the proposals set out will facilitate necessary consolidation within the market and enable trustees to take a long term approach to providing resilient and sustainable products for savers’ retirement income, as well as the range of investments and strategies they can access to deliver that. In this way, members can be confident of achieving better outcomes from their DC pension scheme investments and their engagement in the wider UK economy, and greater benefit to the UK itself.

Guy Opperman MP
Minister for Pensions and Financial Inclusion

1. Financial Conduct Authority PS20/4: Amendment of COBS 21.3 permitted link rules ↩