Scale does not automatically boost returns, a new report by the Pensions Policy Institute has found, echoing analysis published by the Pensions Regulator last month. The analysis comes as defined contribution defaults must reach £25bn by 2030 under new legislation.  

The paper published on Tuesday, ‘Assessing megafund pension reforms: insights from international experience’, sponsored by smaller providers SEI Master Trust and Now Pensions, concludes that cost savings, rather than investment performance, lead to economies of scale. 

“There is no guarantee that UK megafund reforms will achieve the better returns for savers targeted by government. The PPI’s new international analysis of similar measures, alongside data from stakeholder interviews, paints a more complex picture for return levels and other implications of the reforms,” said report author and PPI research associate Melissa Echalier.  

“While learning from other countries can be insightful, differences between pension systems make it challenging to draw clear conclusions. In the UK’s fragmented system, the introduction of megafunds will likely play out differently to countries such as Australia and Canada,” she added.  

Steve Charlton, DC and solutions managing director at SEI, said: “Scale can provide useful capabilities, but it is not an outcome in its own right. What ultimately matters is whether pension schemes deliver good value and more savings for members to spend in their retirement, and this research helps bring that focus back to the fore.”  

Lizzy Holliday, director of public affairs and policy at Now Pensions, said lessons can be learnt from international comparisons but that each country has differing systems, demographics and markets.  

“The report highlights that scale, private market investment capabilities and cost efficiencies can be achieved in a number of ways. There are also a broader set of factors that influence domestic and private market investment that must be considered. It will be important to take these into account at the next stage of policy and regulatory development to support delivery of good member outcomes,” she said. 

The PPI found that the growth strategies of Australian superannuation schemes – often cited by government – had lower performance than UK DC schemes in the five years to 2024, although the two are difficult to compare because of differing time periods and the fact UK figures show returns before charges, while Australian figures are net of investment fees and tax but before administration fees, among others.
   

     
“Where scale is beneficial, savings typically stem from cost reductions, and while administration and investment fees are falling in Australia, they remain on average higher than the UK charges cap,” the PPI said. 

It suggests that scale on its own might not be enough to achieve one aim of the government’s reforms, to channel pension fund money into UK projects. At the same time, it points out that consolidation is already taking place at different levels, with master trusts reducing from 38 to 31 between 2019 and 2025, and asset managers pooling investor assets in funds.   

“Understanding how new regulations could build on efficiencies already achieved” will be important, the institute noted.   

The report comes a month after analysis by TPR came to a similar conclusion. It found that while there was some emerging evidence of economies of scale benefits, “this is not unequivocal or guaranteed”.  

Its report found that “the current UK evidence linking scheme size with gross investment returns is weak”, adding that a 2023 report by the Department for Work and Pensions on DC market trends “generally shows no correlation between AUM size and investment performance, whether for master trusts or GPPs in the UK”.  

In 2024, the DWP published further analysis, ‘Pension fund investment and the UK economy’, in which the department stated that there was “weak correlation between the asset size of Master Trusts / GPPs and 5-year gross investment performance”, producing a chart that illustrates this. 

TPR said it will take time for UK pensions to build the size and the systems needed to take full advantage of the opportunities of scale.  

The regulator cites a government report on the DC pensions market which concluded that larger schemes were able to negotiate lower service provider fees and operate more efficiently, suggesting again that cost is the key driver.  

Some investment experts argue that performance in DC is affected by lifestyling rather than size, with UK defaults derisking towards retirement.  

Head of dynamic real return at Columbia Threadneedle, Christopher Mahon, called lifestyling the “Achilles heel in DC pensions”.  

His research found that while it is mandatory in the UK, Australian supers avoid it, leaving UK savers with an average performance drag of 2.3% a year – about £12,000 on a £100,000 pot. This manifests at older ages, with younger savers in both countries faring similarly.  

Since 2013 the older derisked savers have always underperformed over any five-year period, he said. This was even true for the five years ending 30 March 2020, he said, which was “smack bang in the middle of the Covid crash. Even then, the gain from the lower risk strategy did not make up for the opportunity cost of being out of the market previously.”   

Mahon argued that as well as hurting savers, “excessive derisking in DC pensions contributes to the outflows and related decline of UK financial markets and the lack of capital to support domestic growth”.