De La Rue has become the latest employer to move members of its defined contribution pension plan and the DC section of its hybrid scheme to a DC master trust, as governance cost and member expectations are increasing. How much of the latest consolidation activity is driven by the new value for money assessments?

 

Consolidation of DC schemes is the stated aim of the government and the Pensions Regulator, who have introduced a new value for money test for small schemes from October.  

 

Many employers have heard the call, not least because of the indirect push through governance requirements ever harder to meet in-house. Last year, troubled banknote maker De La Rue – which recently issued a profit warning – and its pension fund trustees reviewed how money purchase benefits are provided and decided to move all active members of the De La Rue Defined Contribution Plan to the LifeSight Master Trust.  

 

“We were keen to provide members access to not only competitively priced investment funds but access to many financial planning and welfare tools. LifeSight provide the tools and services that we are not able to provide,” the scheme told members.  

 

The firm and trustees chose to also move members of the Money Purchase Section of the De La Rue Pension Scheme and the Extra Pension Accounts for members of the Retirement Plan Section to LifeSight. The DC section held £16.2m in April 2021, managed by Aviva and BlackRock; the De La Rue DC Plan was worth £96.6m. 

 

De La Rue’s pension department declined to comment on the move. The trustees have also been reviewing their defined benefit investment strategy, “with the aim of providing greater security for member benefits, particularly in retirement”. 

 

The new value for money assessments for schemes with assets below £100m mean trustees must compare their scheme’s costs, charges and investment returns against three other schemes, as well as carry out a self-assessment of their scheme’s governance and administration in line with seven key metrics. The outcome has to be reported in the chair’s statement and where trustees can’t prove that their scheme offers value, they will be expected to wind it up. The requirements started with scheme years ending after the end of December. 

 

The De La Rue trustees concluded in the latest chair’s statement that their scheme provided good value but still chose to move to a master trust. 

 

“Lots of what we are seeing at the moment is a result of transfers that have been in a pipeline for some time. It’s still a bit early to see the real impact of the new small scheme VfM tests,” said Anna Copestake, a partner at Arc Pensions Law, noting that it may take a few months or even longer to understand how the new assessments are being applied in practice. 

  

“From what I’ve seen so far, the new VfM requirements have focussed minds and led to some acceleration of discussions about transferring DC benefits out. But they tended to be thought process that had already been in train,” she said. 

 

However, some long-standing issues around transfers remain unresolved, she pointed out, including on transferring members with tax protections or with-profits. “They are still real obstacles to consolidation, no matter what the outcome of a scheme’s VfM assessment,” said Copestake. 

 

Despite these obstacles, there is considerable activity in single trust schemes transitioning to master trusts. “The ones that are made public are just a small proportion of those going through the market, and we suspect there is a growing wave of schemes that will follow,” said Ian McQuade, a director at governance consulting firm Muse Advisory. 

 

Value for money and the new assessments are not the only thing driving transfers, he said. “Corporates are seeing that they can improve the offering to their employees, whilst at the same time reduce the overhead efforts of running an own-trust scheme. Where there is an alignment between the sponsor and the trustee, this tends to lead to the best outcomes,” he argued. 

  

However, some own-trust schemes are here for the long term, believes McQuade – this could be because of features such as guaranteed annuity rates or because the sponsor wants to retain complete control of the scheme. “Consolidation isn’t a one size fits all,” he noted.