Pension consolidation should be based on value for money, not asset size

TPT believes that with the value-for-money framework now clearly defined, this should become the main criterion for scheme consolidation. TPT has shared its views in response to the Government’s Pensions Investment Review: Unlocking the UK pensions market for growth consultation.

In its consultation response, TPT argues that rather than scheme size, the primary barriers to investing in UK productive assets are pricing pressures and the availability of suitable investment opportunities. While increased scale may reduce pricing pressures, these proposals won’t necessarily drive allocations to UK productive finance unless more attractive investment opportunities become available.  As such, TPT believes this should be the area of Government policy focus. By simply enforcing a minimum level of assets under management at a level which it believes will drive increased flows into UK productive assets, the Government is unlikely to achieve its primary policy objective and could lead to many unforeseen and unintended consequences.

TPT also believes the minimum assets under management criteria should not apply to default funds catering to minority, religious, or ethical beliefs; otherwise, there is the risk of disenfranchising significant minority communities from pension savings.

Concerns about hybrid schemes

TPT is particularly concerned the Government hasn’t considered the impact of the proposed reforms on hybrid DB/DC master trusts. For many employers, any move to force consolidation of DC assets away from a hybrid scheme could trigger S75 debt liabilities and, in extreme circumstances, schemes falling into the PPF if the employer became insolvent due to the debt. For members with hybrid benefits, any forced move of DC benefits outside the hybrid trust would negatively impact their ability to use their DC benefits to fund their pension commencement lump sum. In the case of DC members with GMP underpins, it would be impossible to achieve this as DC-only providers cannot offer these benefits.

As a hybrid DB/DC master trust with c.£12.bn of assets, TPT already has an in-house investment manager who allocates to private markets investing in various asset classes, including UK infrastructure.

Stifling innovation

TPT recognises the UK pension market is already far more consolidated at the provider level than many major markets used as comparators. It is TPT’s view that the proposed reforms could effectively lock out any new entrants to the market and stifle innovation. Existing regulations and market pressures have been effective at driving DC Master Trust consolidation, and the market is arguably at a point where further reduction could result in an oligopoly of larger providers with little tangible benefit to members.

TPT believes smaller master trusts have been instrumental in driving innovation, particularly in private market investment, ahead of many larger competitors. TPT argues the Government should support smaller DC schemes if they can offer better member outcomes. This parallels other financial services sectors, where challengers have enhanced customer experiences and encouraged larger firms to improve their offerings. 

Increasing costs for UK business

Given the complex pension environment and the significant regulatory change already underway, TPT believes that 2030 is not an achievable timeline for a change of this scale. TPT recognises that forcing a potential change of scheme or provider in this timeframe will inevitably increase the costs of pension provision to employers across several areas, including procurement, HR, payroll, finance, and professional services. This will be an unwelcome additional expense for firms that could significantly hinder the Government’s growth agenda.

David Lane, Chief Executive of TPT Retirement Solutions, comments:

“The Government is at risk of not achieving its desired objectives with these proposals. In their current form, the changes would stifle innovation and limit competition. Simply introducing a requirement for larger default funds will not increase investment in UK productive assets. Worse, in the suggested timeframe, the changes would increase costs to employers, holding back growth at a difficult time for the economy.

Hybrid schemes like ours allow employers to consolidate DB, DC, and hybrid benefits and potentially offer multi-employer CDC when available, helping fulfil many of the Government’s policy objectives. Withdrawing the ability to offer DC consolidation from hybrid schemes would harm the market, stifle innovation, and negatively affect employers and members, so any minimum AUM criteria should not apply.

We believe consolidation could significantly improve the DC pension market. However, this consolidation should be based on providing the best value for money for scheme members, not solely on asset size. Moving to a larger provider or default fund does not guarantee a better member outcome. Industry surveys, such as those produced by CAPA data, have highlighted the extreme variability in outcomes and the fact that the smaller providers have often generated the best returns.” 

Notes to Editors:

TPT Retirement Solutions (TPT) is one of the UK’s leading providers of workplace pensions with over 75 years’ experience of managing defined benefit and defined contribution pension schemes. It has £9.6 billion of assets under management (as at 30 September 2023) and more than 450,000 members.

TPT’s mission is to make pension schemes perform better for everyone, from the sponsoring employers and trustees to the members who are saving for the future. They are an innovative, forward-thinking organisation, investing in technology to improve the services they provide. TPT are ultimately owned by a pension fund, providing genuine alignment of interests with those of their clients and scheme members.