25: DWP consultation proposes new DC pension scheme compliance regime

A significant consultation has been released by the Department for Work and Pensions (DWP) affecting defined contribution (DC) pension schemes. It covers a number of matters but the standout item is a statutory and regulatory drive to encourage smaller DC occupational pension schemes to consolidate (eg by transferring their members and assets to a master trust or group personal pension scheme).

In a nutshell, the consultation proposes that from 5 October 2021:

• trustees of DC schemes with less than £100 million of assets will be required to carry out a value for members (VFM) assessment annually;
• the parameters for the VFM assessment are far reaching and require trustees to consider how their scheme performs in the following areas:
  • costs and charges;
  • net investment returns; and
  • seven administration and governance metrics.
• as part of any VFM assessment of a scheme’s costs, charges and net investment returns, trustees will need to compare their scheme against three ‘comparator schemes’;
• trustees will be required to report on their VFM assessment in their annual DC Chair’s statement and their scheme’s annual return to The Pensions Regulator; and
• subject to certain exceptions, if trustees consider that their scheme is not delivering good overall value following its VFM assessment, the government expects them to take prompt steps to consolidate and wind up their scheme.

This will be a significant new compliance development for occupational DC schemes and their trustee boards. While the consultation suggests that well-run smaller schemes have nothing to fear, the administrative and financial burden of complying with this new VFM assessment regime is likely to be material for most affected schemes.

Some trustee boards and scheme sponsors may see this as a cue to start making consolidation queries straight away, which may not be a bad idea since the route to consolidation will not necessarily be straight forward. Each transfer has its own risk issues and there may be some material practical and legal hurdles to grapple with. While various parts of the consultation acknowledge these challenges, the DWP does not offer many (if any) silver bullets to solve them.

The pensions law team at BDB Pitmans has the expertise to assist DC pension scheme trustees and sponsors with any queries about the proposed new compliance regime, including advice on:

• the proposed legislation and how and when it may affect DC pension schemes;
• managing the legal aspects of any DC pension scheme’s transfer and winding up process and finding solutions to complex issues such as:
  • the technical hurdles to transferring certain assets without obtaining member consent;
  • what to do if the VAR assessment results in the need for a scheme’s trustees to proceed with a transfer and wind up but the scheme’s sponsor will not fund the expenses of that process;
  • managing surplus funds on a winding up;
  • review and negotiation of the document to achieve the transfer of members and assets to a receiving arrangement; and
  • ensuring appropriate protection for a scheme’s trustees both during and after any transfer and winding up.