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Sometimes in public policy, inventing something completely new isn’t the right thing to do. Instead, it means admitting that the old machinery needs a proper service. The UK pensions system is one of our great social achievements, but it has developed in a particularly British way – evolving rather than being engineered.
What we have now is a system that works, yet still has room to deliver more for savers and the wider UK.
A clear way forward?
The direction of travel in the defined contribution pensions market is now clear. Over the next decade, the workplace market is likely to have fewer, much larger participants. By 2035, we should expect a market dominated by a limited number of large providers, each managing tens of billions of pounds on behalf of savers. Far from being an alarming rupture with the past, this consolidation marks the next natural stage in the market’s evolution.
Consolidation is not an objective in itself. No saver wakes up in the morning hoping their pension provider has acquired greater operational heft. They want a decent retirement income, clear support and confidence that the system is working in their interests. Scale matters because it can help deliver those things. It allows providers to invest differently, build better internal capability, negotiate more effectively, manage liquidity more confidently and access assets that are currently difficult to reach in small low-cost default funds.
In other words, being big is not enough. A very large pension scheme that simply does the same things at a larger size is not a transformational change. The real prize is being big and clever. That means using scale to move beyond the narrowest definition of cost control and towards a clearer focus on long-term value for members.
What scale makes possible
This is where private markets enter the story. At present, UK DC schemes allocate only a small proportion of assets to private markets. Our new report, developed in partnership with WPI Economics, suggests that, in a more consolidated future market, default funds could hold much higher allocations during the growth phase, closer to the levels seen in more mature international systems. That opens the door to investment in infrastructure, private credit, growth companies, real assets and other long-term opportunities.
The potential benefits are substantial. The modelling suggests that better investment strategies could increase some savers’ pension pots by up to 20%.1 For an early-career saver, that could mean tens of thousands of pounds more in retirement. This isn’t an abstract footnote in an actuarial appendix; it’s the difference between a tighter retirement and a more comfortable one, between fewer options and more choices.
There’s a wider economic prize, too. Larger providers with the ability to invest at scale could help fund infrastructure, support growth businesses and provide long-term capital to firms that might otherwise look overseas when they need serious money to expand. Britain is good at producing promising companies. It has sometimes been less good at keeping them. If pension capital can help more of those firms grow here, employ here and pay taxes here, we should view it as a success for savers and the economy alike.
There’s also an important fairness argument. Some private market assets have historically been easier to access if you are already wealthy enough to write a large cheque and leave it untouched for years. Most people cannot casually place £50,000 into a private fund and then wait patiently for a decade. You generally need the sort of lifestyle that also includes a suspiciously large wine cellar. DC pensions can, if properly governed, give ordinary savers access to long-term investment opportunities that have all too often been the preserve of those with large amounts of spare capital ready to deploy.
Growing up responsibly
None of this means ignoring the risks. A market with fewer, larger providers needs strong governance, effective competition and clear regulation. The value for money framework must reward genuine long-term performance, not herd everyone into the same cautious middle lane. Trustees and governance bodies will need the expertise to challenge complex investment strategies. Intermediaries must help employers assess value, not simply find the cheapest available option with a nice brochure and reassuring stock photography.
Policymakers also have responsibilities. If pension schemes are to invest more in the UK, there must be a pipeline of investable projects that are commercially viable, well structured and capable of delivering returns.
The bigger picture
The prize is a virtuous circle. Bigger scale supports better investment. Better investment supports stronger pension outcomes. Stronger pension outcomes build confidence in saving. Productive investment supports jobs, infrastructure and growth, which in turn strengthen the economy in which savers live and work.
The future pensions market will not be built by nostalgia. Nor will it be built by assuming that what worked tolerably well in a fragmented system will be enough for the next generation. The task now is to make sure that consolidation leads to impact. Bigger providers, better governed and more focused on long-term value, can help savers retire with more, while providing the patient capital the UK economy needs.
The value of investments can go down as well as up and could be worth less than what was paid in. Past performance isn’t a guarantee of future performance.
Additional risks apply to private assets including liquidity and valuation risks.
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1 From scale to impact: A blueprint for the future DC pensions market page 19
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