Providers and consultants have urged the government to focus on value for money metrics, rather than asset size when driving consolidation in the DC market.
These responses suggest that the industry is not fully supportive of the Chancellor’s plans to impose so-called ‘mega funds’ in the DC market, in order to encourage greater investment into productive assets. Initial proposals outlined in the Rachel Reeves’ Mansion House speech suggest workplace pension providers would need to reach of minimum size of £25bn by 2030
There are significant concerns that simply imposing a minimum asset size of workplace pension providers could stifle innovation in the market, and on its own will do little to improve member outcomes.These concerns have been raised in response to the government’s consultation paper: ‘Pensions Investment Review: Unlocking the UK pensions market for growth’.
However, there is support for plan to simplify the transfer process, enabling providers to conduct bulk transfers in the GPP market without seeking individual consent from members.
There was also support for the government’s stated aim to improve member outcomes and for boosting by increased investment into productive finance — but many want a more balanced overall approach, and pointed out that consolidation, and greater investment into private assets, is already happening at pace in the DC market.
In response to the consultation, which closed today, Isio DC investment director Helyne Slade says: “We encourage the Government to reconsider proposals for imposing a minimum asset under management (AUM) thresholds for pension default funds. While we support efforts to improve member outcomes, there is limited evidence that larger fund sizes inherently lead to better diversification, higher returns, or greater investment in UK productive assets.”
Isio adds that a robust value-for-money framework would be a more effective way to drive better outcomes without creating unnecessary market disruption.
Slade adds: “Focusing too rigidly on scale could risk reducing competition, stifling innovation, and limiting the options available to employers and members. Smaller, niche providers often bring tailored solutions that cater to specific member needs, and these should not be disadvantaged by overly high thresholds. If a minimum AUM is deemed necessary, a lower threshold, such as £1billion, combined with exemptions for specialist schemes and a growth period for new entrants, would strike a better balance.”
This view was shared by TPT who stated: “With the value-for-money framework now clearly defined, this should become the main criterion for scheme consolidation.”
In its consultation response, TPT argued that rather than scheme size, the primary barriers to investing in UK productive assets are pricing pressures and the availability of suitable investment opportunities.
It added: “While increased scale may reduce pricing pressures, these proposals won’t necessarily drive allocations to UK productive finance unless more attractive investment opportunities become available.”
It also added that minimum AUM should not apply to default funds catering to minority, religious, or ethical beliefs; otherwise, there is the risk of disenfranchising significant minority communities from pension savings.
TPT also expressed concerns about these proposals stifling innovation. In its response it said: “Existing regulations and market pressures have been effective at driving DC master trust consolidation, and the market is arguably at a point where further reduction could result in an oligopoly of larger providers with little tangible benefit to members.
“TPT believes smaller master trusts have been instrumental in driving innovation, particularly in private market investment, ahead of many larger competitors. TPT argues the Government should support smaller DC schemes if they can offer better member outcomes. This parallels other financial services sectors, where challengers have enhanced customer experiences and encouraged larger firms to improve their offerings.”
Meanwhile consultants Broadstone said the government must provide clear evidence of member benefit from its reforms, which it said was “currently minimal”. Rather than setting a minimum asset size, Broadstone said it wanted the government to focus on creating products that are compelling for pension schemes to invest in.
Broadstone head of policy David Brooks says: “The Government is aiming to leverage the capital tied up within the pension system to achieve its growth ambitions. It is evident why it is prioritising this mission given the rocky start to the year for the UK economy and knock-on consequences for the nation’s standard of living.
“However, while its aims are understandable, there are areas which need far more detail. It is absolutely critical that any reforms provide a clear benefit for members and the evidence from the Government itself does not offer that reassurance.
“The focus, instead, should be on the creation of the products needed to stimulate greater investment from pension funds of all sizes into the UK economy. If the products and benefits can exist then, whether a scheme has £5bn or £50bn in assets, the allocation would be made.”
While there was widespread concerns about some of these proposals Isio’s Slade added: “We welcome proposals to simplify contractual overrides and bulk transfers, provided that robust safeguards are in place to protect members’ interests. There are significant legacy GPP assets that are currently unlikely to be providing value for members and we believe that enabling the easier flow of these assets to more appropriate funds would go a long way to helping the Government achieve its objective of improving member outcomes and facilitating greater investment in productive assets.”
She added: “Assigning responsibility for retirement outcomes to a named executive could encourage more thoughtful decision-making but should only apply to larger employers to avoid placing undue strain on smaller businesses, although we expect these businesses to already have the bandwidth and resources to be doing this already.