The UK’s defined contribution (DC) pensions landscape is set for major change, as research has revealed that 80 percent of businesses currently offering a DC scheme plan to change their provision type in the coming years.
Employers with DC schemes, which accounted for 57 percent of all businesses surveyed by LawDeb Pensions, are moving towards consolidation and more specialised pension management. Nearly two-thirds (63 percent) expect to transition to either a master trust (41 percent) or an own trust (22 percent).
Just 16 percent told researchers they are considering a shift to a Group Personal Pension (GPP), and only 1 percent are looking at reverting to a defined benefit (DB) scheme. One in five (20 percent) say they intend to maintain their current arrangements. (See the bottom of the article for an explanation of the different types of pensions.)
The findings point to the drive for improved value for money for savers as the primary motivator for change, with half (50 percent) of businesses citing it as their main reason. Stronger governance is also a key concern, with 41 percent looking to improve scheme oversight, while 37 percent point to the evolving regulatory environment as a reason for reassessing their pension offering.
Additional influencing factors include cost (34 percent), best practice (33 percent), the range of investment options (28 percent), and the quality of member communications (28 percent). Broader economic and policy changes, such as the Mansion House reform, are shaping decisions for 26 percent of businesses. For a portion of employers (20 percent), inertia plays a role in their current approach, simply continuing with what they already know.
Elizabeth Hartree, trustee director and head of defined contribution at LawDeb Pensions, said: “Our research highlights the proactive steps many UK businesses are currently taking to enhance their DC offerings and better serve their members’ needs.
“On top of this, firms are having to navigate an increasingly complex financial and regulatory landscape. Upcoming changes, such as the Pensions Schemes Bill and measures to introduce Targeted Support, will have a seismic effect on the DC market; and while it could deliver positive, member-focused outcomes, it will require serious consideration from any business with a DC arrangement. It’s clear that businesses are already anticipating widespread changes, but trustees must also ensure that they focus on delivering improved outcomes in the face of a rapidly changing market.”
Different UK DC pension structures
Contract-based pension schemes
- Set up by the employer, but the pension contract is between the employee and the pension provider (usually an insurance company).
- Examples are Group Personal Pensions (GPPs) and Group Stakeholder Pensions.
- These schemes are regulated by the Financial Conduct Authority (FCA).
- There is no trustee board to manage governance, instead, the pension provider manages the scheme. Some employers set up an Independent Governance Committee to oversee it on behalf of members.
- Employers have limited governance responsibility with this type of scheme. The provider handles most of the ongoing decision-making and administration.
- One advantage is that this means there is less administrative burden for employers as it is professionally run by financial institutions.
Trust-based pension schemes
- Set up by the employer, who also appoints a board of trustees to run the scheme.
- Examples of this type of scheme include Master Trusts such as Nest and The People’s Pension, and single-employer trust-based schemes.
- These schemes are regulated by The Pensions Regulator (TPR).
- Governance is managed by trustees with a legal duty to act in the best interests of members.
- Employer roles have more governance responsibility with this type of scheme structure as they must ensure the trustees are appropriately managing the scheme.
- Advantages of this type of scheme are stronger member protection through trustee oversight and more tailored governance.
