Whether the forthcoming ‘scale test’ is critical to governance and improved access to novel asset classes, or the death knell for innovation and a loss for members, depends very much on who you ask within the DC sector.
This proposed ‘scale test’ appears in the Pension Schemes Act, and requires all workplace DC plans (outside of micro schemes) to be within ‘megafund’ size by 2030, in order to continue to receive auto-enrolment contributions.
This means they must have either reached £25bn by this date, or be on a transition pathway. This requires smaller schemes to hold at least £10bn by 2030 and publish a ‘credible plan’ to reach the £25bn target by 2035.
This week two major providers: L&G and Fidelity confirmed their main defaults had passed this main £25bn target – joining a handful of other large AE providers that have reached this scale test already.
There is also the new entrant pathway, in which new schemes with no existing members can enter the market, provided they offer an ‘ innovative proposition’ and a credible plan to reach this £25bn milestone.
A DWP spokesperson says: “The Pension Schemes Bill’s scale test will unlock the benefits of consolidation, delivering better outcomes for members through stronger governance and lower costs.”
Neil Maines, senior investment consultant at XPS Group, is keen to stress that he understands the merits of multi-employer providers having some level of scale, including the greater ability to insource investment capability, particularly in the private market space, and capacity to launch more innovative decumulation solutions.
A People’s Pension report from 2025 suggests that investing 10 per cent of all projected master trust assets in private markets via external asset managers by 2030 could cost these schemes, and ultimately savers, as much £1.5bn per year in fees.
However, Maines also thinks a £25bn minimum red line “is too specific” and it is ultimately capability that drives benefits to members. There are those in the House of Lords who echo his sentiments, and in March an amendment was passed that would give The Pensions Regulator the power to exempt DC pension schemes from the scale test if they can prove they can continue to deliver value for money for members.
Now the Pension Schemes Act has received royal assent, it remains to be seen how t TPR chooses to exercise this power.
Innovation
In any market larger more established players can be upended by quicker, more nimble innovators in the sector. In the AI space this was witnessed in real time when DeepSeek was able to mirror the output of ChatGPT using only a fraction of its resources.
Shabna Islam, head of DC provider relations at Hymans Robertson, says that both larger and smaller schemes are innovating in the pensions market, through use of AI chatbots, sophisticated member behaviour analysis and hyper personalisation, wider financial wellbeing tools and pension apps giving holistic views on finances.
An ability to harness and promote such innovation may be seen as a way to circumvent the scale test, at least for a time. Yet this pathway is only open to new entrants. Maines says there is a compelling case for existing providers who don’t meet the £25bn threshold (even by 2035) but are genuinely innovative to remain in the industry, provided they deliver value for money to savers.
But Daniel Smith, head of workplace investing distribution at Fidelity International, says there are areas where scale could be a boon for innovation.“We are seeing increasing focus on retirement, particularly solutions that provide more certainty of income through risk-sharing or insurance-based approaches, but are flexible to life events throughout retirement. These innovations are critical, but they only become viable
with sufficient scale.”
But Smith is adamant that the only question should be whether members are getting value for money from their retirement plans, something that may be linked to but is not exclusively defined by a scheme’s size.
Current impact of scale test
Several master trusts currently fall well below the 2030 scale test threshold. These include Aviva Master Trust (current size £14.7bn), Aon Master Trust (£7.1bn), and Natwest Cushon (£3.3bn).
NatWest Cushon has grown 716 per cent over the last six years, according to Corporate Adviser data. Other providers with triple-digit growth over that period include Aon, up 263 per cent.
But is this forthcoming scale test, likely to impact current and future levels of business, within such schemes, when it comes to winning new mandates? Ruari Grant, head of policy and external affairs at TPT Retirement Solutions and formerly head of DC and master trust at Pensions UK, is in a good position to see how the scale test is already affecting the industry.
He says: “Some of these (smaller) schemes I would classify as innovative, and some of them are doing really good things and have good performance.
“Dating back to the first stage of the Pensions Review (in early 2025) and the whisperings about a scale test, a number of these master trusts were starting to see less business come to them from advisors, purely because of the risk (of the test).”
Ten providers already have £25bn of DC assets across their entire book, and two more, Mercer and Aon, already exceed the £10bn milestone. Assuming a growth rate in DC assets of 15 per cent over the next four years (to 31.12.29) 11 providers will pass the £25bn threshold and a further five will meet the £10bn milestone needed for continuing in business on the basis of building a credible pathway to £25bn by 2035.
At this growth rate TPT Retirement Solutions would be the biggest provider not to meet the test.
If smaller master trusts are squeezed out of the marketplace, there is also a worry that competition could be further choked by an inhibition for established international players to enter the space.
Jonathan Parker, head of DC at Redington, part of the Gallagher group,says: “Interesting DC providers from other countries, for example the US and Canada, come to the UK market on quite a regular basis of test whether their model could work in the UK.
“A lot of them have decided there are some headwinds to making a commercial business model here. The charge cap has been one of those, and the scale test could have the potential to be another factor that gives new firms pause for thought.”
Consolidation
Intertwined with the impact on business is how discussion of the scale test has been a driving force for consolidation in the DC space.
After months of speculation, in December, WTW confirmed it will acquire Cushon from NatWest Group for an undisclosed sum. As it stands Cushon will run as a separate master trust from WTW’s LifeSight master trust, with the former focused onmid-sized business and the latter targeting larger corporates for their workplace pension. Standard Life is also to acquire Aegon UK in a £2bn deal.
In the overall marketplace, the UK’s DC landscape saw further concentration in 2025, falling 15 per cent, to 790 non-micro DC and hybrid schemes, according to data published by The Pensions Regulator.
According to Corporate Adviser data, the number of multi-employer DC arrangement active savers is up 26.7 per cent over the last six years. This is likely in part driven by transfers into master trusts from single employer DC arrangements. “We’re definitely seeing a lot more acquisitions and mergers,” says Mark Futcher, head of DC at Barnett Waddingham.
“All of the narrative from government is that they want to really slim down the provider market. In our view, not all of those master trusts should have made it through authorisation to begin with. There are still some quite bad master trusts that exist, and while I don’t think we’ll ever get down to 12, we will have a much smaller number in five years time,” he says.
As of 2025, there are 33 authorised master trusts in the UK, holding more than £200bn in assets, and 91 per cent of overall DC trust assets.
Support for scale
Perhaps unsurprisingly, Nest, which has £60bn in assets currently and is on track for £100bn by the end of the decade, is suportive of the scale test. A spokesperson says: “It is a logical step and aligns with the path Nest has been on. We are confident that the market will remain competitive. Greater consolidation should help drive the scale and professional governance that are proven to improve member outcomes, through stronger negotiating power, lower costs and deeper in-house expertise.”
According to Corporate Adviser data, Nest remains the biggest by number of active members by a considerable margin, with more than 5 million members, up 6.3 per cent over 2025. L&G and Aviva sit in second and third place respectively, both with more than 2 million members, and both having increased member numbers by just over 2 per cent over the course of last year.
VFM
Industry concerns about the scale test intertwine with another area of the Pension Schemes Bill that has raised eyebrows. Value for Money is a mandatory framework that is intended to shift focus from overall costs to performance through a rating system of investments, and like the scale test is inspired by the Australian DC pensions landscape.
Maines of XPS can see the contradictions within the two pieces of legislation: “There is clearly the potential that the strongest VFM assessments could be achieved by providers who don’t pass the scale test which will defy the policymakers’ intentions,” he says. With this in mind he suggests a solution, namely a test in
which metrics around scale are included in the VFM framework, rather than scale being a separate policy initiative.
Tess Page, UK wealth strategy leader at Mercer says: “In a worst case scenario the scale test and VFM could operate in a way that drives reduced competition, and VFM drives reduced innovation, leading to a continued focus on cost as the core selection criteria for clients.”
While Page admits this scenario is still some time from becoming reality, she insists that to avoid it, it is important that final details of the proposals includes a renewed focus on member outcomes and how these are affected across different member and market segments.
BOX: An innovator stares down the barrel
Digital pension provider Collegia Pension has reached break-even just four years after its launch. Powered by a digital platform, it aims to deliver high levels of service at zero cost for employers. Collegia now supports more than 40,000 members across 4,000 employers, and is the first provider in the UK to be authorised by the FCA to offer a pension that is both an AE and personal scheme.
The Collegia app also supports more than 100 languages, looking to help employers better serve diverse workforces.
Collegia chief executive Eduardo Chazan says: “We were very early adopters of AI. We have a membership that is heavily focused around SMEs, and estimate around a third of our members do not have English as their first language. So when AI first came, we made sure that those complex issues around pensions can be dealt in a language that someone feels most comfortable with.”
Like others, Collegia is under threat due to the scale test. Even though investment decisions are overseen by the $867bn AllianceBernstein, in part due to it being a fairly new organisation, the scheme does not have enough assets to have any serious likelihood of reaching £25bn by 2030.
He says that government has changed the rules midway through the game. “Competition is restricted on an artificial level, and this signals that scale is the only thing that matters is problematic.”
For Chazan, the focus must be on member outcomes, assessed through the service provided, effective pensions engagement and strong investment performance. “Over time scale becomes a consequence of innovations. But innovation needs time to test it out, and it is smaller players that are better placed to do that, as seen in our AI powered translation.”
Further innovations by Collegia include developing its own pension tracing and filing service. For Chazan, even as its existence is under threat. the developments undertaken by Collegia continue to be essential, particularly as he points out that “the government’s own communication with SMEs are abysmal.”
