Small defined contribution pension schemes are at threat of closure following a government consultation on setting a minimum size requirement for funds to drive consolidation and boost productive investments in the UK.
In a series of reforms to be outlined in the Chancellor’s Mansion House Speech on Thursday the government will consult on setting a minimum size requirement for the 60 different multi-employer schemes currently existing in the market ‘to ensure they deliver on their investment potential’. It will also consult on measures to facilitate consolidation into megafunds, including legislating to allow fund managers to more easily move savers from underperforming schemes to ones that deliver higher returns for them. It cites £25bn as a figure where schemes start to achieve effective levels of productive investment.
However, single-employer trusts will not be subject to the new requirement.
The government will also consolidate the Local Government Pension Scheme in England and Wales into a handful of megafunds, like those in Australia and Canada. The Treasury estimates the LGPS will manage assets worth around £500 billion by 2030. Currently split across 86 different administering authorities, but pooled across eight investment pools, schemes manage assets between £300 million and £30 billion, with local government officials and councillors managing each fund.
The Treasury says consolidating the assets into a handful of megafunds run by professional fund managers will allow them to invest more in assets like infrastructure, supporting economic growth and local investment. A new independent review process will be established to ensure each of the 86 Administering Authorities is fit for purpose.
The government’s analysis – published today ahead of further detail on the Pensions Investment Review to be given in the Chancellor’s Mansion House speech tomorrow – claims that pension funds begin to return much greater productive investment levels once the size of assets they manage reaches between £25-50 billion. At this point they are better placed to invest in a wider range of assets, such as start-ups and expensive infrastructure projects, says the Treasury. Larger pensions funds of greater than £50 billion in assets can harness further benefits including the ability to invest directly in large scale projects such as infrastructure at lower cost, it argues. The Government says Canada’s pension schemes invest around four times more in infrastructure, while Australia pension schemes invest around three times more in infrastructure and 10 times more in private equity than UK DC providers.
The Corporate Adviser Master Trust & GPP Report showed there were seven UK providers with more than £25bn of assets as at 31.12.23. Since then two more providers are likely to have passed the £25bn mark. Corporate Adviser Pensions Average (CAPA) performance data shows that several smaller funds, including the Aon Mastertrust, Lifesight and SEI, all with less than £11bn of assets at the end of 2023, have consistently outperformed other providers.
Chancellor of the Exchequer, Rachel Reeves said: “Last month’s Budget fixed the foundations to restore economic stability and put our public services on a firmer footing. Now we’re going for growth.
“That starts with the biggest set of reforms to the pensions market in decades to unlock tens of billions of pounds of investment in business and infrastructure, boost people’s savings in retirement and drive economic growth so we can make every part of Britain better off.”
Pensions minister Emma Reynolds said: “Harnessing the power of this multi-billion-pound industry is a win-win, benefiting future pensioners, and our wider economy.
“These reforms could unlock £80bn of investment into exciting new businesses and critical infrastructure.”
Tess Page, head of UK wealth strategy at Mercer, said: “While further consolidation is welcome it is unlikely to be a panacea across the board, and we are surprised not to see more focus on single employer DC schemes, which we think was a missed opportunity.
“In the LGPS area we agree there are rational reasons to pool assets to achieve economies of scale, but any potential incremental savings from further consolidation needs to be balanced against the significant costs and disruption consolidation of the existing eight pools would entail.
“Given the previously stated focus on fuelling UK growth, we are surprised not to hear more at this stage on potential incentives and ideas where pension funds could play a bigger role. That said, we are pleased to see that decision making bodies will continue to be able to make investment decisions without mandating certain allocations.
“However, there still needs to be viable investments in the UK for the funds to invest in to ensure they can achieve the best returns for members. We welcome all initiatives to make it easier for institutional investors to invest at scale in UK opportunities, for example the BBB Growth Fund, National Wealth Fund and the recently announced Social Impact Fund. These should also be combined with incentives, either through the tax system or through other risk sharing mechanisms. Otherwise, decision makers and fund managers are likely to arrive at the same conclusion that there are more attractive investments for their members elsewhere.”
Colin Cartwright, partner in Aon’s UK investment practice, said: “Aon welcomes measures that improve returns and governance of pension schemes, and which will be to the good of savers and employers that are contributing to these schemes. We also welcome investment in the UK, but any such investments will need to be able to stand on their own merit from a risk and return perspective if they are to be effective and benefit those savers and employers. We look forward to seeing further details on how these proposed reforms will deliver these important elements.”