There remains a lack of consensus over key elements of the Pension Schemes Act across the industry, with some concerned about the impact of the scale test and mandation, and others describing it as ‘embarrassing’ that legislation has been needed to drive better member outcomes.
This comment was made by Alison Hatcher, professional trustee and chief client officer at Vidett, at a recent roundtable event hosted by Corporate Adviser at the House of Lords. The discussion covered both measures in the Pension Schemes Act as well as the recently launched Corporate Adviser Master Trust and GPP Defaults report.
“It’s actually really embarrassing as an industry that the government has had to step in to such a degree because it wouldn’t happen anywhere else. The government is using what might be deemed crude metrics, but that’s because what they’re trying to do is drive outcomes and drive behaviour. Effectively what they’re trying to say is we should be investing in a broader category of investments, and we should be trying to drive value, and we should be offering better value to our members,” she said.
The final text of the Pension Schemes Act relating to the scale test now offers clarity as to how it can be implemented, and how those master trusts currently falling short can yet survive.
As it stands, large defined contribution workplace providers and master trusts must have at least £25 billion within their default arrangements by 2030, or face
the prospect of losing access to auto-enrolment contributions.
However, schemes with at least £10bn in their default by this point can apply to enter into a transition pathway scheme, if they can prove a ‘credible’ pathway towards reaching the target by 2035. New market entrants can also apply for entry via an innovation pathway.
Even though the final version of the text is less stringent than when the scale test was initially proposed, the impact of the legislation from when it was first proffered has been keenly felt by the industry.
Shabna Islam, head of DC provider relations at Hymans Robertson, said: “The uncertainty [with regards to the scale test] in the last couple of years influenced quite a lot of corporates in terms of their decision-making around which provider to go with. We saw a trend in terms of going with a safer option. As a result, the smaller providers, the less well-known providers, were suffering.”
Data from the most recent Corporate Adviser Master Trust and GPP Defaults report reflects this. SEI, which has topped performance tables, but has a default fund which falls significantly short of the £25bn target, actually saw a fall in the number of employers within its DC scheme from 2024 to 2025, dropping from 177 to 174.
Callum Stewart, DC investment partner at XPS, is largely supportive of the scale test, claiming that even though the watering down in its final form may go against the intent of the policy, it also allows for a flexibility that could enable smaller and more innovative providers to survive.
However, he also questioned whether the fundamental government reasoning for such an initiative is on solid ground. “Bigger scale does mean in theory better outcomes if you’ve got two providers with the same proposition, through ways such as greater bargaining power.
“Yet the reality is very different. Expertise, quality, and credibility really drive the outcome, not always scale. But what [the scale test] does helpfully is force providers to look through a more strategic lens in terms of how they’re planning for the future, not just in terms of scale, but in terms of how they’re improving the proposition to deliver outcomes.”
Mansion House considerations
Pensions minister Torsten Bell has previously argued that scale is an opportunity to lower scheme fees while improving governance and enabling improved long-term investment into the
UK economy.
Darren Hedgley, principal partner at Secondsight, echoed this argument to
some extent. He said: “Some consolidation from scale could be beneficial to the industry in the long term, especially when you consider the complexity within the DC space these days.”
Bell’s angle also relates to the Mansion House Accord and resulting mandation element, which was included in the recent Pension Schemes Act. Within these arrangements, some DC pension schemes at first volunteered to meet a government target of investing at least 10 per cent of their main default funds into private markets by 2030, with at least half of that allocated domestically. Now, with mandation the government has the legal power to force schemes to hit this number
if required.
Priti Ruparelia, head of DC and trustee director at Independent Governance
Group, said: “I’ve got a scheme at the moment that is moving to a master trust, and they think the scale test in its current form is going to save it, which gives them a lot of relief.
“I also see the implementation of private markets (through mandation) as a real positive, as even though it has to be implemented with efficient oversight, in a way that can still be beneficial to a pension portfolio.”
Australian model
When it comes to the scale test, the UK government has previously argued that a larger, more consolidated system will be able to achieve the benefits of scale seen in countries like Australia, with lower costs, an ability to invest in a wider range of assets, and higher returns for savers.
Rebecca Green, senior consultant at Lane Clark and Peacock, sees another potential advantage to scale: “If you don’t want to make a decision and then have to make another decision about where a client’s money is going to go, that means scale to some extent.”
Green also points to data in the Master Trust and GPP Defaults report that shows that in the UK, the biggest seven providers now account for over 78 per cent of multi-employer DC assets. This compares to 62.6 per cent of Australian Super assets being held by the biggest eight providers at the end of 2024. The largest 12 UK providers, all on course to meet the scale test, hold 94.6 per cent of assets, a proportion greater than the largest 21 Australian Supers.
Is bigger better?
Nicky Barker, principal and consulting team leader at Mercer Marsh Benefits, said: “Bigger is not always necessarily best, but I think it will take away some of the acquisition risk that we’ve been seeing now in the market. Also, I hope it will still continue to drive the changes that we really need.”
Ultimately, her position represents a common theme heard around the table; that while reform is needed, it is hoped that smaller peers can still survive, particularly given that they have often driven the innovation that is needed within the industry.
While there has been much government focus on how scale can alter the investment practices of schemes, there is also much to be done in other areas of the industry, such as the consolidation of small pots to give members greater benefits from any combination of smaller schemes that may occur.
Louise Wheeler, member of the DC product team at Aon, also honed in on the customer service element: “There’s an awful lot more we can be doing around engaging and helping people when they come to make retirement decisions,” she said.
“We’re seeing a lot more automation across providers and service levels are generally picking up, but the differentiator now is around that attention to detail, how we focus on that care and how we support our clients when they’re in these workplace pensions with us.”
The Corporate Adviser report notes that members transferring in benefits from other arrangements is indicative of a high level of engagement with a provider, and is also reflective of the profile of the membership.
Hargreaves Lansdown and Penfold have the highest levels of transfers in, at 23 per cent and 25 per cent respectively. Aegon ARC has also achieved double-digit transfer-in rates, at 11 per cent.
On interactions with members, Richard Grover, strategic employee benefits consultant at Wingate Benefit Solutions, was also of the view that scale does not necessarily mean better services.
“With certain energy suppliers that have achieved massive scale, as anyone may know this doesn’t always mean a better level of customer service. There’s a risk that when you hit size this area of the business becomes a box-ticking exercise.”
Another topic of conversation at the event was the recent move by the DWP in laying out a path towards member assets being bulk transferred into a proposed Retirement Collective Defined Contribution plan without express consent, in its response to a public policy consultation on pension schemes.
Mohammed Amin, employee benefits consultancy manager at Grant Thornton, said: “These changes will make a massive difference, because where you’ve got an individual who’s not engaged, you previously have had to physically request that bulk offer. If the bulk offer transfer follows them automatically, that would make a lot of difference, especially as currently we spend around 60 per cent of our time doing engagement work.”
That the DWP is continuing its reforms, in addition to bodies such as The Pensions Regulator publishing its first guidance on artificial intelligence in May this year, shows how quick the pace of change is in the UK pensions industry even in the immediate aftermath of the Pension Schemes Act.
James Phillips, wealth and workplace distribution director at Royal London, agreed that the speed of this technological change, combined with major legislation would continue to impact the sector for a number of years to come.
He described the current barrage of legislative change as “the most significant industry legislation that we’ve seen since auto enrolment”.
He added: “This legislative change, combined with the advancements of technology means we collectively have a duty of care to support members, also to support employers to help their members and trustees in delivering great outcomes.”