DWP and TPR attempt to smooth transition to scale

The DWP and the Pensions Regulator have both issued statements to explain the policy intent and principles behind the new scale requirements that will apply to DC master trusts and group personal pension plans from 2030. As well as setting out more detail of what schemes will need to do to meet the scale requirements, the statements are also designed to try to reduce the impact which perceived risks around scale are already having on employer’s decisions when reviewing their pension arrangements.

This speedbrief summarises those statements and looks at what master trusts seeking to take advantage of the transition pathway may need to consider.

What are the scale requirements?

The Pension Schemes Bill will introduce a requirement for DC master trusts and group personal pension plans to operate a ‘main scale default arrangement’ (MSDA) which has at least £25 billion in assets from 2030, in order to qualify to continue to receive automatic enrolment contributions.

To support the transition to scale, the government plans to establish two additional routes for schemes:

1. the transition pathway – giving schemes with £10bn of assets in their MSDA by 2030 a further 5 years to reach the £25bn threshold, where they can demonstrate a credible plan for growth, and
2. the new entrant pathway – enabling new schemes to enter the market after 2030 and grow to scale while offering a genuinely innovative proposition

Broadly speaking, the MSDA is the default investment proposition for members who have benefits with that provider who have not made an active investment choice. It can be made up of several default arrangements potentially across different schemes operated by the same provider where they share a common investment strategy.

Why have these statements been issued?

These statements provide further detail on the scale requirements to support master trusts and associated parties as they prepare for these changes. The statements:

• set out DWP’s and TPR’s current thinking on the principles that might underpin a credible plan to get to scale in the future for a scheme seeking to enter the transition pathway, and
• include some analysis of indicative growth scenarios and key drivers based on a range of assumptions to help inform those assessing the ability of existing master trusts to grow to scale in the relevant timescales and to support conversations about scheme selection

TPR’s statement recognises that the announcement of the new scale requirements is already having an impact on employer selection and deselection of master trusts, as a result of perceptions over which master trusts will make the cut. For example, TPR says that some smaller master trusts have indicated that they are being excluded from employee benefit consultants’ selection lists for prospective employers because of assumptions about their ability to qualify for the transition pathway by 2030 and meet scale by 2035.

To mitigate this, TPR makes clear that selection decisions should be based on an objective appraisal of the value offered by a scheme and other relevant factors affecting potential saver outcomes. These include:

• compliance with auto-enrolment requirements
• value for money, assessing investment outcomes and strategies along with the level of services that a scheme provides relative to costs and charges
• the quality of governance and of the scheme’s systems and processes
• readiness for compliance with future requirements under the Bill, including scale and credible growth plans, and
• administrative and transition processes

TPR also suggests that employers and their advisers should not assume that all master trusts not yet at scale will be unable to meet the criteria and sets out its own analysis which highlights the potential growth of master trusts between now and 2035.

What do schemes need to do?

Master trusts and GPP providers will have already started to assess whether they are on track to meet the new scale requirements and to put appropriate plans in place.

These statements are particularly relevant for master trusts that are planning to make use of the transition pathway. The DWP statement makes clear that schemes that intend to apply to use the transition pathway will need to develop a clear, credible plan for how they will reach scale. When developing this, schemes will need to consider:

• Having a credible plan to build to scale – this will need to include details of how the scheme intends to fund growth, the expected revenue streams over the pathway period, projected operational and technical costs, and how investment planning and risk will be managed as the scheme grows. It will also need to set out projections for organic growth, for example, through continued employer and employee contributions and securing new business and inorganic growth, for example, through consolidation and mergers
• Building their investment capability (including in-house expertise) – schemes will need to demonstrate how their investment functions will be strengthened to meet the expectations of a scheme at scale, including the ability to access a broader range of investments to help increase diversification, and negotiate lower fees
• Building their governance capability– schemes will need to set out how their governance arrangements will evolve to support the transition to scale and how the scheme will be able to operate effectively at scale once it exits the pathway. This will need to include plans for delivering on wider pensions reforms such as value for money and guided retirement
• Ensuring appropriate expertise is in place – this includes identifying the skills, personnel and systems required to support scaled operations and how these will be developed during the pathway period. Key skills will include expert market knowledge in investment and governance as well as wider skills such as risk management and communications
• Developing robust growth estimates – these will need to be supported by clear underlying assumptions, alongside analysis of factors that may cause growth projections to vary. TPR’s statement provides additional details on this and sets out TPR’s high, medium and low assumptions for the organic growth master trusts might expect to achieve between 2025 and 2035
• Setting out other essential planning features – this includes key delivery milestones, how progress will be monitored and what contingency plans will be put in place, if milestones are not met

TPR indicates that the level of detail in a scheme’s plan should be proportionate and reflect the scheme’s starting position relative to the £25 billion target. 

What happens next?

It is expected the Pension Schemes Bill will receive Royal Assent shortly. After this, the government plans to consult on regulations which will set out more detail on how the new scale requirements will work. This will include details of the assets that can be counted towards the scale threshold, and the adjustments and exclusions relevant to this calculation. We can also expect further guidance from TPR.

The statements confirm that the new scale requirements will apply no earlier than 1 January 2030, with the application process for the transition pathway opening in 2029.

Are these statements enough?

It is helpful to have more detail from the DWP and TPR on how the transition pathway will work and the steps master trusts will need to take to qualify for this.

The timing of these statements appears to have been driven as much by a desire to address concerns that employee benefit consultants (and, in turn, employers) are overestimating the risk of some master trusts not being able to enter the transition pathway, as it has been by the need to provide more clarity on the process to the master trusts themselves. This is important to mitigate the impact these planned reforms are already having on the market. This would be helped further if the application process for the transition pathway opened sooner rather than later.