TPR: We must end 'two classes' of DC membership
The Pensions Regulator (TPR) has called for greater consolidation of defined contribution (DC) schemes, cautioning about the risk posed to members of small schemes.
The warning came as the watchdog's latest figures revealed private sector DC membership has for the first time overtaken that of defined benefit (DB).
There are now 14.8 million members in DC schemes, compared to 11.7 million DB members. This also means that 56% of all private sector savers and 90% of active members are in DC schemes.
The members are spread across 34,500 DC schemes, most of which are ‘micro schemes' made up of between 2 and 11 members.
However, the number of DC schemes fell by 2% over the last 12 months, while there was an 8% drop among those with 12 or more members.
The figures were revealed in the watchdog's annual DC Trust report, published 27 January, and are based on scheme returns issued from July to December last year, which relate to the 2015/16 levy year.
However, executive director for regulatory policy Andrew Warwick-Thompson hit out at what he called the "two classes" of DC members.
"Our concerns are rising about the fragmentation of DC provision and the persistence of a tail of sub-scale schemes," he said. "In our opinion, these pose an unacceptable risk to consumer protection. The consolidation trend we have observed and welcomed in previous years has slowed.
"We strongly believe that it is unacceptable to have two classes of DC pension savers - those than benefit from the premium of scale and good governance and administration, and those that do not."
The regulator outlined a three-pronged approach to resolve the issue, including education and enforcement of its 21st century trustee initiative.
It will also work with upcoming master trust regulations - currently being debated in Parliament - to create a "secure, scalable and value for money cornerstone of the multi-employer DC savings market".
It also welcomed a government consultation on whether an actuarial certificate is needed for DC consolidation.
Hargreaves Lansdown senior pension analyst Nathan Long also expressed concern about the number of DC schemes, but added he expected to see these numbers fall over the next few years.
"There remains an eye-watering number of schemes out there," he said. "While many are very well managed, there are huge doubts around the quality of smaller schemes.
"We expect to see the number of these schemes reduce sharply in the coming years. We know the government is concerned to see fewer, better run schemes in the future."
The large growth in DC membership has been credited to success of the AE regime.
Of all schemes, 730 are being used for auto-enrolment (AE), with 360 of these fitting in the ‘micro scheme' category. Nearly all DC members (95%) are in schemes being used for AE.
Warwick-Thompson welcomed the continuing success.
"We have now passed a significant point in UK private sector pensions provision," he said. "This transformation is the direct result of the success of AE which has seen more than seven million workers join a pension scheme for the first time."
Key findings of the report
- DC scheme volumes are stabilising
- 97% of schemes have members aged over 50
- 87 master trusts with DC members are registered with TPR
- Membership has increased 42% since 2016, and by over 300% since 20090
- 56% are in DC schemes, while 90% of active members are saving into a DC scheme
- 95% of members are in schemes being used for AE
- 730 schemes are being used for AE, up from 450 last year - almost half of these schemes have fewer than 12 members
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