The UK investment industry has warned that mandating a minimum size for defined contribution (DC) schemes will not lead to a higher allocation to UK growth assets on its own, and that consolidation could be better achieved through existing initiatives such as the Value for Money (VfM) framework.
In her first Mansion House speech in November, UK chancellor Rachel Reeves launched a consultation on measures to facilitate the consolidation of schemes into megafunds, including legislating to allow fund managers to move savers more easily from underperforming schemes to ones that deliver higher returns.
The proposals in the consultation seek to “drive scale and the greater efficiency, stronger governance, enhanced investment diversification, and improved bargaining power, it can bring”.
With the consultation closing today, Zoe Alexander, director of policy and advocacy at the Pensions and Lifetime Savings Association (PLSA), said the association “appreciates” why the government is looking to accelerate consolidation in DC schemes and is “very” supportive of the proposal, however, she said there are areas of concern for PLSA members.
According to Alexander, the proposals themselves will not lead to more UK investment as there needs to be an “adequate” supply of investable assets. Therefore, she said delivering broader changes to drive UK growth such as planning reform will be “key” to creating a strong pipeline of opportunities.
The People’s Pensions, which today said it is targeting £4bn in private markets investments with a “significant” proportion of that allocation in the UK, agreed by saying its targeted allocation will be dependent on it being able to access a “dependable pipeline” of good quality investable assets that meet its return requirements.
Renny Biggins, head of retirement at The Investing and Saving Alliance (TISA), pointed out that scale does not automatically translate into UK private asset investment.
Biggins explained that economies of scale will make some asset classes easier to access but ultimately, schemes have a duty placed on them to make decisions which benefit their members and, if it can be demonstrated that non-UK investments are more appropriate, they should invest in those.
TPT Retirement Solutions agreed that the primary barriers to investing in UK productive assets are pricing pressures and the availability of suitable investment opportunities.
“While increased scale may reduce pricing pressures, these proposals won’t necessarily drive allocations to UK productive finance unless more attractive investment opportunities become available. As such, TPT believes this should be the area of government policy focus,” it said, adding: “By simply enforcing a minimum level of assets under management at a level which it believes will drive increased flows into UK productive assets, the government is unlikely to achieve its primary policy objective and could lead to many unforeseen and unintended consequences.”
Value for Money
Helyne Slade, DC investment director at Isio, said there is limited evidence that larger fund sizes inherently lead to better diversification, higher returns, or greater investment in UK productive assets.
She instead suggested that a robust value-for-money framework would be a more effective way to drive better outcomes without creating unnecessary market disruption.
“Focusing too rigidly on scale could risk reducing competition, stifling innovation, and limiting the options available to employers and members. Smaller, niche providers often bring tailored solutions that cater to specific member needs, and these should not be disadvantaged by overly high thresholds,” she noted.
Slade said that if a minimum of assets under management (AUM) is deemed necessary, a lower threshold, such as £1bn, combined with exemptions for specialist schemes and a growth period for new entrants, would strike a better balance.
The PLSA also raised concerns over the minimum AUM for schemes, which it said could lead to market disruption and loss of schemes that are “performing well, delivering good member outcomes, and already allocate to productive assets”.
PLSA’s Alexander agrees that existing initiatives, such as VfM small pots and DC decumulation will themselves have the effect of driving consolidation and implementing overlapping proposals could be wasteful and compromise the overall efficiency gains intended by the government.
She said: “We urge the government to carefully consider the sequencing of reforms already in train and focus on increasing the supply of investable UK assets to achieve its aims effectively.”
TISA’s Biggins also agreed that VfM could achieve similar consolidation through a consumer-focused approach and as such, tick both boxes.
He pointed out that VfM will require firms to undertake assessments on a number of their default arrangements – which could stretch into the hundreds. However, proposals contained in this consultation seek to restrict the number of default arrangements – perhaps down to 10 or less, so there is an immediate misalignment between the two.
Innovation
According to TPT, the UK pension market is already far more consolidated at the provider level than many major markets used as comparators and proposed reforms could lock out any new entrants to the market and stifle innovation.
It said: “Existing regulations and market pressures have been effective at driving DC master trust consolidation, and the market is arguably at a point where further reduction could result in an oligopoly of larger providers with little tangible benefit to members.”
TPT said that smaller master trusts have been instrumental in driving innovation, particularly in private market investment, ahead of many larger competitors.
Instead of driving further consolidation, TPT said the government should support smaller DC schemes if they can offer better member outcomes.
David Lane, TPT’s chief executive officer, said that consolidation should be based on providing the best value for money for scheme members, not solely on asset size.
“Moving to a larger provider or default fund does not guarantee a better member outcome. Industry surveys, such as those produced by CAPA data, have highlighted the extreme variability in outcomes and the fact that the smaller providers have often generated the best returns,” he explained.
Wrong place
LCP, meanwhile, argued that the drive to ‘mega funds’ in the DC market is the wrong place to focus to deliver the government’s aim of generating more economic growth.
The consultancy said that consolidating these schemes will take a long time, cause massive cost and disruption and may still fail to deliver the government’s stated objectives of investing more in the UK.
Instead, it said the government should be explicit about what it means by productive finance investment and where investment is needed.
It also suggested establishing a new ‘comply or explain’ regime for DC scheme investments, one which goes beyond existing disclosure requirements.
As a result, it said, trustees and providers would retain their freedom to invest in the best interests of members but would have to explain to the regulator if they had concluded that this was not compatible with a specified minimum allocation to, for example, UK infrastructure.
Laura Myers, head of DC at LCP, said: “Ministers now need to be clearer about what it is they want to achieve and to focus legislation on that rather than solely on scale as a proxy.
“It is also vital that the interests of members are put at front and centre of any reform agenda and not regarded as an afterthought.”
Lack of detail
David Brooks, head of policy at Broadstone, agreed there are areas that need “far more detail”.
“It is absolutely critical that any reforms provide a clear benefit for members and the evidence from the government itself does not offer that reassurance.
“The focus, instead, should be on the creation of the products needed to stimulate greater investment from pension funds of all sizes into the UK economy. If the products and benefits can exist then, whether a scheme has £5bn or £50bn in assets, the allocation would be made.”
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