Route to ‘fewer, bigger, better pension schemes’

Reforms look set to lead to scale, consolidation, and a focus on value.  

It’s a busy period for pensions, with the Government unveiling several proposals for reform just a few months after being elected.  

The Pension Investment Review, launched in August 2024, explores the opportunity to boost investment, increase returns for savers, and reduce inefficiencies and fragmentation in the UK pension ecosystem.  

An interim report outlining proposed reforms was published on 14 November 2024, and further views are being sought on proposals to increase scale and consolidation and explore how pension fund investments can support UK economic growth. The interim report also sets out proposals for the local government pension scheme on pooling assets and strengthening governance. 

The consultations run until 16 January 2025, with recommendations expected later in the year.  

Scale and consolidation  

The proposals suggest setting a minimum size for multi-employer scheme default arrangements ranging between £25bn and £50bn, by 2030. Providers must demonstrate their ability to meet this scale threshold, however it remains uncertain whether the scale test should be applied at ‘arrangement’ level or the ‘building block level’.  

At first glance, the defined contribution (DC) market appears reasonably consolidated, with six major providers controlling approximately 75% of the assets, alongside two Master Trusts with meaningful scale. However, there is underlying market fragmentation. The Government is keen to explore opportunities to transition to “fewer, bigger, better run schemes” and boost the overall efficiency of the pension system, including improving returns for savers.  

The Scottish Widows primary investment default, which underpins our suite of DC pensions (both contract and trust-based), is approximately £60bn-plus, making it the largest in the market. So, we already meet the proposed scale tests. 

Whether a scale test applies at the 'arrangement' level, or the 'building block' level will lead to interesting outcomes. For instance, cash or cash-equivalent building blocks – often used in the final stages of Lifestyling – are typically much smaller. The impact on target date funds could also be significant, where each maturity year has a different fund, meaning the design of these funds is crucial.  

The consultation is also examining bespoke funds, selected by employers or trustees, to determine if they are a good option for members. This raises questions regarding the maximum number of default funds made available by providers and this will be limited, with exceptions for special funds such as those supporting faith-based investments.  

As the market transitions to a more consolidated landscape, it will be incredibly important to ensure that reforms are enacted in a way that avoids undue disruption. It will also be interesting to observe how the scale threshold for providers will influence decision-making and market activity; ensuring that a pension provider can demonstrate commitment to the market is a key consideration for any employer or trustee board. 

Contractual override

Proposals for a contractual override could significantly simplify the process of transferring funds in contract-based arrangements. Currently, obtaining consent from each individual member can be challenging and costly, especially when members are not actively engaged. This change could make it much easier and more cost-effective to manage transitions between providers and types of pension scheme. 

The role of an Independent Governance Committee (IGC) is also being considered as part of the review, raising interesting questions about the extent of its duties, potentially aligning its responsibilities more closely with those of a trustee.  

Overall, many will agree that the simplicity is welcome. However, comparable powers to those afforded to trustees should also be considered to ensure parity across DC schemes. For example, extending the existing bulk transfer regulations to support non-consent switches from trust-based to contract-based arrangements.  

Costs versus value 

Plans to introduce a refreshed Value for Money (VFM) framework were announced previously and are expected to be included in the Pension Schemes Bill, alongside a regulatory regime covering DC pension schemes. The VFM framework is being developed to shift the focus from short-term costs to long-term value for savers, to drive the consolidation of smaller and badly governed schemes and increase transparency and competition in the market.

The increased focus on value is very welcome after a period of significant downward pressure on pricing, not least in terms of facilitating allocations to a wider range of asset classes, which is expected to drive increased diversification and enhanced returns. 

Retirement on the C-suite agenda 

The Pension Investment Review explores additional measures required to shift the focus from price to value, building on the VFM framework. For example, consideration is being given to a requirement for larger employers appointing senior executives or board members to ensure pensions are selected based on the best overall member outcomes.

The remit may also extend to a broader responsibility for the retirement outcomes of employees and a duty to routinely review the DC pension provision to ensure it continues to deliver value for members, not just the lowest price. This would be a welcome development – putting retirement outcomes firmly on the C-suite agenda. 

Even if larger employers take on new duties and a new focus, they will still rely on experts for guidance. While advice to individual employees is regulated, institutional advice of this nature is not, and the consultation explores whether this needs to be addressed. The Competition and Markets Authority has previously highlighted the need for greater regulation in this area, and many believe that its introduction could enhance standards and expertise in the field. 

On the cusp of change 

It’s clear that the DC workplace pension landscape is on the cusp of a period of significant change. It's difficult to argue against an end goal of "fewer, bigger, better-run schemes," and improved returns for members and a reimagined pension investment landscape that supports innovation, sustainability, and growth.  

Given the scale of these proposals, there will be many voices and stakeholders to consider but it’s key to remain focused on helping DC savers achieve a secure future retirement. The second phase of the Pensions Review, with the focus on pension adequacy, is a vital part of the overall reforms and will help address the pension savings crisis.

We welcome the government's agenda and are committed to working closely with them and the broader industry to ensure a safe transition to the end state.