UK Pensions - Proposed new investment and consolidation requirements for DC schemes

Trustees of defined contribution (DC) occupational pension schemes will be interested in the government’s latest proposals to encourage DC schemes to increase investment in patient capital. The term “patient capital” is used to describe a broad range of alternative investment assets intended to deliver long-term returns, such as infrastructure, real estate, private equity/debt and venture capital. The government wants to encourage investment in patient capital because it believes this will boost the economy. However, the consultation also highlights the potential benefit to members in accessing the “illiquidity premium” which results from being invested for the long term, as well as the possibility that investment in the “real economy” will improve member engagement.
What is being proposed?
The proposals being consulted on include:
  • Policy on illiquid investments: larger DC schemes would be required to explain their policy in relation to investment in illiquid assets in their statement of investment principles. They would also be required to report annually on their approximate percentage holdings in illiquid assets. This annual report would be made by way of the implementation statement which DC schemes will be required to produce from 1 October 2020. This requirement would apply to DC schemes with 5,000 or 20,000 or more members (or alternatively £250m or £1bn of assets).
  • Consolidation: smaller DC schemes would be required to explain (by way of the chair’s statement) their assessment of whether it would be in members’ interests to be transferred into another scheme with significantly more scale. The explanation would need to be updated at least every 3 years, and after any significant change in size or demographic profile. This requirement would apply to DC schemes with fewer than 1,000 members (or alternatively less than £10m in assets).
  • Charge cap: an additional method of assessing compliance with the charge cap (which applies to default arrangements of DC schemes used for auto-enrolment) would be introduced. This would accommodate performance fees within the charge cap.
What happens next?
The consultation closes on 1 April 2019. There is no indication of when the new requirements are likely to come into force.
The new requirements will force trustees of larger DC schemes to consider their policy in relation to investing in illiquid assets. They will also force smaller DC schemes to consider the merits of consolidation. However, it is uncertain whether either requirement will result in more investment in patient capital. As the consultation recognises, trustees need to make such decisions in accordance with their legal duties – in relation to investments, this generally means that trustees should look to secure the best realistic return over the long term, given the need to control for risks. Whether this can be achieved by investing in any particular illiquid asset will be a decision for individual trustees in the context of their scheme.
For more information, please speak to your usual Linklaters contact.