On 5 February 2019, the Department for Work and Pensions (DWP) published a consultation on proposals to encourage occupational defined contribution (DC) schemes to invest in illiquid assets such as start-up companies, housing and green energy projects, and to require smaller DC schemes to actively consider consolidating into larger schemes in order to access a wider range of investments. The consultation will run until 1 April 2019.
There are three key proposals:
- requiring large schemes to publish their policy on investing in illiquid assets in the Statement of Investment Principles. Schemes would then be required to report annually in the Implementation Statement on how they have followed this policy, and to provide an approximate breakdown of holdings in this type of investment, with quantitative data. The consultation seeks views on whether ‘large’ schemes should be defined by membership (perhaps over 5,000 or 20,000), or by the level of assets held (perhaps over £250 million or £1 billion);
- requiring smaller DC schemes to assess, every three years, whether it would be in the interests of members if the scheme consolidated into a larger scheme with greater economies of scale, and to report the conclusions in the DC Chair’s Statement. The DWP does not clarify precisely how trustees would carry out this assessment, but states that it would need to be holistic and that statutory or non-statutory guidance may be necessary. The consultation also asks whether the size threshold for this requirement should be set at under 1,000 members or less than £10 million in assets. There is also a suggestion that schemes could be encouraged to consolidate on other grounds, such as trustee knowledge and understanding, open or closed status, or member demographics; and
- providing an additional method of assessment for compliance with the 0.75% default fund charge cap in order to accommodate performance fees, which are common in funds offering illiquid assets.
The consultation also includes a non-exhaustive list of the costs and charges which are intended to be within the scope of the 0.75% charge cap and asks whether any further clarity is required.
These latest proposals reflect the Government’s broader policy of encouraging pension schemes to help boost the economy by driving new investment in smaller and medium-sized unlisted firms, housing, green projects and other infrastructure. They build on the Government’s wider Patient Capital Review, the Treasury’s August 2017 consultation, ‘Financing growth in innovative firms’, and the Law Commission’s recommendations in its 2017 report, ‘Pension Funds and Social Investment’.
The consultation is also a natural progression of The Pension Regulator’s policy objective to promote consolidation and efficiency in DC schemes as part of a focus on improved governance, greater member engagement and better outcomes for members. Since the start of 2011, assets held by occupational DC schemes have nearly tripled to around £60 billion. The growth in large and consolidated DC schemes has been boosted by automatic enrolment and DC scheme sponsors and trustees transferring to master trusts or otherwise winding up. We have advised on several such projects and would be happy to discuss the potential impact of the DWP’s proposals and other recent regulatory changes on your scheme.