Occupational Pension Schemes (Administration, Investment, Charges and Governance) (Amendment) Regulations 2021

Baroness Drake Excerpts

Monday 6th September 2021 Grand Committee

[Baroness Janke (LD)]

My Lords, we certainly agree with the policy aims and mechanisms of this instrument and endorse the Government’s actions to make sure that

“members do not languish in sub-optimal arrangements that do not meet governance requirements and are unable to take full use of investment opportunities, to the benefit of the end saver’s eventual retirement outcome”,

as the Explanatory Memorandum states.

As the Minister has said, paragraph 7.6 of the Explanatory Memorandum explains that Regulation 2 requires that schemes holding assets worth less than £100 million and which have been operating for three or more years are to compare charges, transaction costs and the return on investments with three other schemes. We are not clear how those schemes are to be selected and who is to select them. Is it the trustees, for example? Are there selection criteria other than that they have assets of more than £100 million and are personal pension schemes? If it is not the trustees, who selects the comparator schemes?

Paragraph 7.8 states:

“Where the trustees have reported that the scheme does not provide good value for members, they are also required to report whether they propose to wind up the scheme and transfer the members’ rights into another scheme or explain to TPR why … not … and what improvements they are planning to make.”


What happens if these improvements are not acceptable to the Pensions Regulator and what powers does the regulator have based on compliance or non-compliance with Regulation 3?

We would probably all agree that it is a good idea to encourage smaller funds to transfer rights or improve if Regulation 2 comparisons show poor performance, but what about larger funds? Should there not be a requirement for them to undertake the same comparisons and take the same actions if their schemes show poor value for money for their members? It is easy to see why small funds should be encouraged in this way but hard to see why larger firms are not similarly encouraged. I would welcome the Minister’s clarification on these points.

[Baroness Drake (Lab)]

My Lords, I refer to my entry in the register of interests, particularly as trustee of a large master trust and the Telefónica pension scheme. I thank the Minister for the clarity of her explanation. It is a pleasure to talk face to face, rather than digitally, for once.

Of the three main provisions in these draft regulations, one requires smaller DC schemes with less than £100 million to demonstrate overall good value. If they cannot, the expectation is that they will wind up and consolidate into another scheme. The regulations also require schemes to take their net investment returns and increase flexibility to take account of performance fees when calculating the 0.75% pension cap on pension savings.

I support the focus on smaller schemes and the drive to consolidate them into larger schemes. The TPR evidence reveals that many smaller schemes struggle to match the governance, investment opportunities and charges delivered by schemes operating at scale, but the Minister’s aspirations are high. I quote Guy Opperman, who wrote:

“It is not my intention to stop at £5 billion”,


and that

“There is no doubt in my mind that there must be further consolidation”,


and that

“further action will follow”.

However, even a threshold of £5 billion goes beyond small and will catch all but the very largest of DC schemes.

The Minister believes that consolidation drives better member outcomes, a view again with which I agree, and I accept that scale matters. The Minister wants to understand the barriers to further consolidation through two lenses. He stated:

“I am particularly keen to understand how the creation of greater scale in the DC market can benefit members through economies of scale and access to alternative investments.”


However, the Government have to recognise that they created some of those barriers, even though the case for scale was well documented at the time. When auto-enrolment was introduced, they took the view that there should be an open market with virtually no barriers, or few barriers, to entry, with the inevitable proliferation of provision and the acceleration of small pot numbers that followed, which made decisions for employers even more complex. The transfer of the cost of market failure on to the members of the growing number of poorly regulated master trusts was eventually recognised and led to the new authorisation regime. At the start of that authorisation regime there were 90 master trusts; 37 were granted authorisation, a reduction in the overall size of the market by 58.8% in a little over a year, perhaps an indication of how inefficient the original policy had been. Is it anticipated that the drive to accelerate the consolidation of schemes will lead to a further reduction in the number of authorised master trusts? Will the TPR be expected to modify its approach to the authorisation criteria? Given the Minister’s aspiration and the Government’s drive for greater consolidation, what do they consider would be the optimal outcome in terms of the number of schemes? How do they define optimum scale in terms of assets under management?

The Government’s policy that consolidation into fewer and larger DC schemes will facilitate greater investment into a wider range of assets and bring benefits to scheme members and the UK economy was captured in the letter of 4 August from the Prime Minister and Chancellor, entitled Igniting an Investment Big Bang: A Challenge from the Prime Minister and Chancellor to the UK’s Institutional Investors. They called for the need to,

“seize this moment … to unlock the hundreds of billions of pounds sitting in UK institutional investors”—

particularly pension schemes—

“and use it to drive the UK’s recovery”,

and growth. They added that the Government were,

“doing everything possible—short of mandating more investment in these areas as some have advocated—to encourage a change in mindset and behaviour among institutional investors, and we remain open to addressing further barriers”.