If there was ever an opportunity for a Chancellor to ‘mic drop, exit stage left’ at the end of a speech, the Mansion House speech was it. The Budget lacked of any major announcements on pensions, but the Mansion House announcements, if enacted, could signal the largest ever pension reform to the UK DC scheme design, by ushering in what the government is calling ‘megafunds’.
The push for consolidation has remained on the new government’s agenda, but this announcement marks a shift from single-employer trust schemes to master trusts and broader contract-based products.
Rachel Reeves sees Canadian- and Australian-style “megafunds” as essential for powering UK economic growth. While there is no mandate for schemes to invest in the UK, larger asset pools are expected to naturally drive more significant, economy-supporting investment.
Since this announcement, pensions minister Emma Reynolds has suggested further measures if reforms fail to boost domestic investment, while Lord Mayor Alastair King has urged Britain’s biggest pension funds to invest more in the UK stock market.
Steve Jobs was famously quoted as saying, “We don’t ask customers what they want; we tell them what they need.” Apparently, UK DC pension scheme members need more UK investments!
According to the Chancellor, the benefits of scale start to be realised at around £25bn, but the real benefits from an economic growth perspective start from £50bn. In the UK market, there are three master trusts with assets more than £25bn, but none have £50bn. However, where there is a will, there is a way.
Given the millions held in DC pensions, it’s no wonder that they have caught the Chancellor’s attention. Across the largest 10 DC providers, less than a quarter of member assets are in master trusts, which creates a real opportunity for further market consolidation. There is scale in DC, but it’s spread across a range of different products.
To facilitate consolidation, the Chancellor will provide new powers to make it easier to transfer assets between the different DC pension products present in the UK. That puts insurer-led master trusts and their wider books of business in a very strong position relative to other master trusts in the market. It also gives them a massive amount of work to do to consolidate their product range.
The minimum threshold, subject to consultation, is likely to be applicable from 2030, which gives the provider and master trust market time to grow assets, consolidate, win new business, and share plans for meeting any new size requirements. For the master trust market, it’s a race to get to scale. All of this will be considered further through industry consultations. However, we expect to see a very different master trust and provider market by then – a UK DC oligopoly where no new competitors, innovators or disruptors can enter, due to the minimum asset size required.
A key point of nuance set out in the Chancellor’s proposals is that the calculation of assets will relate specifically to a ‘default fund’, rather than all scheme assets. This supports those with a default fund used across multiple products, and is likely to impact the future design of provider offerings, limiting the number of default fund options.
What about members and their savings? The Chancellor said these changes should benefit member outcomes. But, is this really a win-win situation – invest more in the UK, for the benefit of the British people while adding growth to their pension savings? The government’s own analysis suggests there is very little expected benefit
for members.
Alongside minimum thresholds, the government is also asking for views on potential policy approaches that could result in employers having a duty to review their pension schemes every five years. This responsibility could sit at the board level, which could re-establish senior engagement in retirement provision.
Finally, there was surprise single employer trusts were not mentioned, for now at least. However, these trusts are likely to be indirectly affected by consolidation in the multi-employer space. We expect the new requirements under Value for Money established through the Pensions Schemes Bill in 2025. The view is that these requirements will continue to drive further consolidation from this part of the DC market, although we’re now likely to be comparing schemes to megafunds in future.
