Member Article

The Department for Work and Pensions (DWP) has published its combined consultation on draft Regulations designed to improve accessibility of illiquid assets for defined contribution schemes.

The Department for Work and Pensions (DWP) has published its combined consultation on draft Regulations designed to improve accessibility of illiquid assets for defined contribution schemes. The new proposals focus on introducing a requirement for defined contribution (DC) schemes to disclose and explain their policies on illiquid investments and for schemes with more than £100 million in assets to disclose current asset classes to members. Additionally, the DWP proposes to bring forward legislation to remove employer related investment restrictions applicable to master trusts.

The DWP has also responded in the consultation to its November 2021 consultation on enabling investment in productive finance and the call for evidence on DC consolidation published the in June 2021.

This comes in what the DWP describes as a ‘seminal year’ for DC schemes. In 2022, DC schemes will be required to disclose investment performance for the first time, and those with less than £100 million in assets will undergo their first value for money assessments.

1. Enabling Investment in Productive Finance

The DWP's previous consultations have looked at barriers to investing in illiquid assets, particularly in respect of performance fees.  In its latest response (published as part of the new consultation), the DWP acknowledged that its initial proposals were not were not positively received or supported by the pensions industry. The DWP confirmed that change in this area is still to be considered, but recognises the need to understand the industry’s concerns and engage further before doing so.

2. Call for evidence on DC Consolidation

The DWP has concluded following the call for evidence that they will work with the Pensions Regulator to monitor the impact of the value for money assessment and will not introduce regulations designed to encourage consolidation this year. As such, the current focus will be on creating a value for money framework. The DWP's current view is that informative, member focused value metrics that will enable comparison and competition will improve member outcomes more so than targeting consolidation measures. However, the reality is that members do not choose pension provision, their employer does so. This means that any comparison and competition will come into play when employers are selecting pensions vehicles for the workforce rather than at member level.

3. Illiquid Investments

Following the Government's Patient Capital Review the DWP proposed to amend legislation so that DC schemes are required to disclose in their statement of investment principles their policy on illiquid investments. Additionally, the proposal is that schemes with more than £100 million in total assets will be required to publicly disclose and explain the default asset class allocation within the Chair's statement.

The proposed amendment, if implemented, do not mean that trustees must invest a portion of their assets in illiquids but provides a nudge in that direction. The DWP says that the change is intended to make trustees to reflect on decisions made as part of their ongoing fiduciary duty. As such it is not compulsory to invest in certain asset classes, but it may help shift the focus from cost to value and so make it easier for trustees to invest in illiquids.

4. Asset Allocation Disclosure 

Schemes with £100 million in assets or above (including hybrid schemes) will be required to disclose in the annual chair's governance statement the percentage of assets allocated in the default fund to the following categories:

• Cash
• Bonds
• Listed equities
• Property
• Infrastructure
• Private debt.

This is currently provided on a voluntary basis by some master trusts. Additionally, the proposal is that this information will be publicly available alongside other publicly available information which schemes are required to produce on a website with the aim of increasing transparency.

5. Employer Related Investment

The employer related investment regime was designed to restrict the extent to which pension scheme assets could be invested in the scheme’s sponsoring or participating employers in order to reduce the risk of those employers misappropriating scheme funds.

The current regime reflects the typical structure of schemes at the time of its introduction in the early 1990s. At that time, defined benefit (DB) schemes were the prevailing means of pension provision by employers and typically these were run by an employer or a group of associated companies. However pension provision has changed significantly since then with the introduction of auto-enrolment, a significant reduction in the level of DB pension provision, and a significant increase in the use of Master Trusts.

The regime has been amended to accommodate some of these developments, but crucially the provisions relating to multi-employer schemes do not reflect the structure of master trusts which the consultation recognises may have several hundred un-connected participating employers. Given this fundamental difference, it is perhaps inappropriate to subject master trusts to the same employer related investment restrictions as other single and connected or smaller multi-employer schemes.

The DWP is concerned that doing so results in a high level of time spent on compliance matters and restricts the asset classes available to master trusts even where the risk to members is relatively low. It therefore proposes to amend the regime in relation to master trusts with 500 or more active employers so that the existing restrictions would only apply to investments in the scheme funder, the scheme strategist or anyone connected or associated with those two entitles.

Conclusions and next steps

It is clear from the consultation that the government’s overall policy goal is to ensure that the DC market is fit for the future, and this is to be achieved in part through a combination of improved governance and disclosure, and the ability to consider investment in illiquid assets. It is also clear from the consultation that part of the policy intent is to enable large institutional investors, namely pension schemes, to look at investments in areas such as green infrastructure or technology start-ups where there may be a wider benefit to society, not just to the member's return on investments.

Given the recent private member's bill on auto-enrolment and continued discussions around net pay arrangements, it is clear that government should not lose sight of wider issues around pension schemes.

In terms of next steps and action trustees and employers should be taking, the consultation is very early stages. That said trustees should be aware that obligations around disclosure in respect of the chair's statement and statement of investment principles will change if the proposals are implemented. Employers should be mindful when reviewing their pension provision of the fact that the regulatory framework continues to change and evolve.

The consultation continues until 11 May 2022. 

For further information or if you have any questions, please contact Suzanne Burrell or your usual pensions contact.