The Department for Work and Pensions (DWP) has launched a consultation: Defined contribution (DC) pensions: investments and consolidation on proposals to make trustees of DC schemes reveal their views on whether it would be “in the scheme members’ interests to be transferred into another scheme” such as a Master Trust. This proposal sits among other measures intended to encourage investment by DC schemes in illiquid investments and to consider how best to incorporate performance fees within the default fund charge cap.

Consolidation – a nudge

From a starting point that smaller schemes are less likely to meet its expectations in terms of governance, the DWP takes the view that consolidation into larger schemes would allow governance costs to be met from a larger pool of assets and would allow schemes to widen their investment range. The DWP therefore suggests that the Chair’s statement should be extended to include an assessment of whether consolidation might be in members’ interests.

The DWP considers that such an assessment would need to be “holistic” and that guidance may be necessary. It also asks above what size scheme threshold (members or assets) would be large enough to be exempt from this requirement; suggesting those with more than 1,000 members or in excess of £10m assets would be exempt from it. The DWP also recommends that schemes make this assessment every three years and asks on what other grounds consolidation might be appropriate.

Illiquid assets

DC schemes have typically had low levels of assets invested in more illiquid assets such as infrastructure and green energy projects, which can offer attractive returns but are often more expensive to exit at short notice. The DWP, therefore, proposes that larger money purchase schemes (perhaps above £250m/£1bn assets or 5,000/20,000 members) could use their default arrangements to invest in these classes.

The DWP proposes that in scope schemes should state their policy in relation to illiquid assets in the Statement of Investment Principles (SIP). Schemes would then report how they had followed this policy in their annual ‘Implementation Statement’, which they will have to start sending out from October 2020. This would set out a breakdown of holdings, should contain “quantitative data” and would need to avoid generic statements, though the DWP does recognise that it would need to “define illiquid investments reliably”.

The charge cap

The third strand of this consultation explores whether the charge cap could be amended to make it easier for trustees to consider investments with performance fees; often associated with illiquid assets. The DWP outlines the two current charge assessment methods (the percentage and combination charge approaches) and proposes a further one that would give greater flexibility and still come within the current cap.

Finally there are some clarifications to what costs and charges are within scope of the current cap.

The consultation ends on 1 April 2019.