The pensions industry is urging the government to focus on value and outcomes over the mere size of pension funds as it responds to a consultation on consolidating defined contribution multi-employer schemes. 

 

In mid-November, the government launched two consultations after the chancellor’s Mansion House speech. They propose to take pension consolidation in the Local Government Pension Scheme and the DC sector further and doing this faster than previous governments had envisaged. 

 

For DC, the government is proposing to set a minimum size for default arrangements in multi-employer schemes, suggesting £25bn to £50bn, and a limit on the number of defaults that can be operated by a single provider or master trust.  

 

The proposals, to be implemented until 2030, would lead to immense M&A activity and market disruption. Currently, there are about 30 master trusts and 30 providers of contract-based workplace schemes, with only a small number of group personal pensions and no master trusts having passed the £50bn mark as yet. 

 

    

A minimum size is being proposed despite analysis by the Department for Work and Pensions – published alongside the consultation – that there is “weak correlation between the asset size of master trusts/GPPs and five-year gross investment performance” based on the “small sample” of providers. The highest performance was delivered by the second-smallest DC provider, while the third-largest provider had the lowest returns.  

 

Performance for pension scheme members might not be the government’s main concern, however, since it is looking to secure funding for infrastructure projects and UK start-ups in its mission for growth.  

 

 

The DC industry argues such levels of consolidation could be counterproductive, neither leading to greater investment in private markets as the government hopes, nor improving outcomes. 

“In their current form, the changes would stifle innovation and limit competition. Simply introducing a requirement for larger default funds will not increase investment in UK productive assets,” said David Lane, chief executive of TPT Retirement Solutions, which runs both defined benefit and DC. “Worse, in the suggested timeframe, the changes would increase costs to employers, holding back growth at a difficult time for the economy,” he added. 

 

TPT said the primary barrier to investing in UK productive assets is not scheme size but pricing pressures and the availability of suitable investment opportunities. 

 

Consolidation should be based on providing the best value for money for scheme members instead of size, Lane said. The Pensions Regulator and Financial Conduct Authority have been working on a value for money framework under which DC schemes would need to measure and disclose investment performance, costs and service quality, while governing bodies would be required to publicly rate schemes as green, amber or red. Amber or red-rated schemes would need to take specific actions to improve value. The FCA consulted last year for contract-based providers, with TPR saying the proposals would be reflected in this year’s pension schemes bill for trust-based schemes.
 

    

 

The Pensions and Lifetime Savings Association said it supports the goals of economic growth, consolidation and better outcomes. 

 

“However, the DC scale test risks unintended market disruption and will not, on its own, deliver investment in UK growth,” said Zoe Alexander, director of policy and advocacy. 

“Instead, we urge the government to carefully consider the sequencing of reforms already in train and focus on increasing the supply of investible UK assets to achieve its aims effectively,” she said. 

The value for money framework and the consolidator model for small pension pots share many of the same aims as the proposed size threshold for megafunds, said the Association of British Insurers’ director of policy and long-term savings, Yvonne Braun. 

Legislation to allow transfers from GPPs without individual consent – included in the consultation proposals – will be needed to deliver all of these, she observed. 

  

Braun warned that new minimum size requirements should not run concurrently with these ongoing projects: “The pensions industry cannot safely implement all four market-shifting policies whilst also delivering pensions dashboards and a new support model for customers. The government must prioritise.” 

 

Braun stressed that adequacy must not fall off the radar amid the structural reforms. “It is also vital that government begins the second phase of its Pensions Review as soon as possible to stave off the looming pension savings crisis,” she said. 

 

 

The government should reconsider its minimum size proposals, agreed Helyne Slade, who heads up DC investment at consultancy Isio. 

  

“While we support efforts to improve member outcomes, there is limited evidence that larger fund sizes inherently lead to better diversification, higher returns, or greater investment in UK productive assets,” Slade said, adding that “a robust value for money framework would be a more effective way to drive better outcomes without creating unnecessary market disruption”. 

 

Slade agreed that a rigid focus on scale could reduce competition and suggested a minimum size of £1bn, combined with exemptions for specialist schemes and a growth period for new entrants.  

  

Others have also questioned the government’s minimum size, with consulting firm Broadstone saying £25bn feels arbitrary and asking how such a scheme is more likely to invest in productive finance than a scheme of £10bn.  

 

Broadstone argues that the focus should be on “creating products that are compelling for investment via tax breaks, first loss protection or other downside protection, clear societal value and low cost to avoid the erosion of value”. 

Its head of policy David Brooks said: “The government is aiming to leverage the capital tied up within the pension system to achieve its growth ambitions.” 

 

Brooks added it was “absolutely critical” that reforms provide a benefit for members, saying that “the evidence from the government itself does not offer that reassurance”. 

Others are keen to stress that they are committed to greater investment in productive finance, however.

The People's Pension, at £31bn one of the UK's largest master trusts, said it will start investing up to 10% of growth pool assets in private markets, with a target to reach £4bn by 2030. . 

 

The master trust noted that "a substantial part" of this could be invested in the UK "if assets are available that meet the return requirement". It will now hire a private markets specialist and create a research capability.

The Society of Pension Professionals said that UK pension funds already play an important role in supporting economic growth and are a major source of long-term investment in the UK economy.

It added: "The industry broadly agrees it can still do more and is very much committed to doing so, as evidenced by the generally positive manner in which most of the industry has reacted to government announcements on the need for an increased commitment to productive finance.”