The Government’s recent announcement outlines plans to double the number of UK pension megafunds by 2030 – aiming for all multi-employer defined contribution (DC) schemes and Local Government Pension Scheme (LGPS) pools to manage at least £25 billion in assets. It marks a significant step forward for the UK’s pensions landscape. As professional trustees, our responsibility is to safeguard and grow the assets of our DC schemes for the ultimate benefit of members. These proposals offer compelling potential.

The work of government seems to lack the trustee voice – the very people who’ll need to ensure any investments, consolidation, transition, data requirements and value is executed in the member interest. The new reserve powers will need careful consideration. Will a change in Trust Law be needed to bring this into effect?  How will they work if an investment has been deemed unsuitable by professionals?  It’s essential for policy makers to work with trustees and move forward together.

A key driver of value is innovation, which I’m a big fan of. We need it for a competitive market that offers true value.  But how do we retain effective governance and support innovation when funds must be a certain size and investments are strongly suggested or possibly mandated?

My simple answer? Involve the trustees and work to ensure board effectiveness. As they’re key stakeholders to achieving this goal, take these decision makers along the journey too!

Our fragmented DC market has been a source of inefficiency, leading to higher costs and, often, sub-optimal returns for savers. The evidence from mature markets like Australia and Canada clearly demonstrates the benefits of scale – not just reduced fees and improved governance but, crucially, unlocking the ability to invest in illiquid assets that can deliver superior, long-term returns.

Compelling figures underscore this drive – a projected £6,000 boost to an average member’s pension pot through consolidation alone and a £1 billion annual cost saving by 2030. I don’t know the detail behind these numbers, but we can certainly buy into the theory.

However, there are schemes that offer great value and are not large. They cater for specific needs and are doing it well. There’s also the barrier that scale provides to our market – administration. Due to size, profitability and complexity, this creates data issues that stop us from being truly digital quickly. We need innovation but don’t want to create artificial barriers now that cause indirect risks to long-term value for members.

A simple solution is to require employers to undertake a review of any mega scheme to ensure it’s still offering value and suitable for their employees. It’s a small amount of oversight that reduces a hold over members if value is not achieved by the scheme.   

Beyond the benefit to savers, the focus on domestic investment, particularly infrastructure, new homes and fast-growing businesses, is equally vital. The decline in pension investment in the UK over the past decade needed to be reversed. The voluntary commitment from pension funds to invest 5% of assets in the UK, alongside new local investment targets for LGPS authorities, promises to channel significant capital where it’s most needed to drive economic growth and create jobs. This isn’t just about ‘backing British businesses’; it’s about identifying robust investment opportunities within our own economy that can deliver long-term value for pension members.

Pension schemes must focus on investments that benefit their members. If the structure isn’t right, this needs to be evolved. If the risk is too high, maybe there’s a role for the British Business Bank or Government to step in. This is how the investment structure would work in other countries. The risk is managed to allow pension schemes to invest and retain their members interests.  Trustees have to put members at the heart of every decision. If we had a clear mandate from all members to invest in the UK no matter what the outcome, life may be different. But that’s not where we’re at.

The proposed Pension Schemes Bill offers crucial ways to facilitate a market transition. The freedom for DC schemes to move savers into better-performing funds and the consolidation of LGPS assets are sensible and necessary measures. We welcome the emphasis on ensuring savers’ interests are always protected throughout these bulk transfers. However, whilst scale is important for efficiency and access to diverse assets, the drive for consolidation shouldn’t inadvertently stifle innovation or reduce market competitiveness.

A healthy pensions ecosystem thrives on diverse providers, each offering different approaches and solutions that cater to varying member needs and risk appetites. It’s crucial the evolving regulatory framework continues to foster an environment where new ideas and innovative strategies can emerge and flourish. Without dynamic competitive tension there’s a risk the long-term value delivered to savers could be compromised, even within larger structures.

Ultimately, this is about building a more resilient and rewarding retirement for millions of UK workers. It aligns the interests of pension savers with the nation’s broader economic prosperity. As professional trustees, we’re ready to play our part in implementing these reforms effectively, ensuring the promise of bigger, better pension schemes becomes a tangible reality for future generations, while championing the ongoing need for market innovation and robust competition.

If you’d like to discuss anything in this article further you can talk to Alison, or get in touch