The UK Government finds itself grappling with an increasingly challenging fiscal environment. Productivity growth has stalled since the 2008 financial crisis, public services are contending with real-time funding pressures and surging demand, and the chancellor continues to reject ‘tax and spend’ solutions.
In search of alternative funding sources, the Labour Government has turned to businesses and private markets to plug the investment gap needed to drive its economic agenda forward.
Cue the 2024 Mansion House speech and the resulting Pensions Investment Review — a development that has sparked considerable debate across the industry. While there’s general agreement that larger funds might generate efficiencies and cost savings, few believe that consolidating defined contribution (DC) pension schemes will resolve the UK’s chronic underinvestment problem.
Do pensions dream of productive finance?
Less discussed, but equally important, is whether consolidation in the DC market will actually improve member outcomes. The Government’s recent consultation paper, Unlocking the UK pensions market for growth, argues that schemes need to hit a minimum size of £25bn to invest meaningfully in productive finance — supposedly resulting in stronger returns for members.
But this feels like an arbitrary threshold. There’s concern that the promised benefits for savers may not materialise — and might, in fact, backfire. As schemes grow, particularly through consolidation, they may become less diverse in their investments, which could ultimately lower returns.
The types of illiquid assets the Government wants funds to invest in remain among the most expensive available
Further complicating matters, the types of illiquid assets the Government wants funds to invest in remain among the most expensive available. Even if they generate higher gross returns, net returns — after hefty management fees — could be significantly lower.
The consultation itself raises important questions (paraphrased here):
- How will consolidation affect saver choice?
- What impact will it have on employer pricing?
- Could it introduce systemic risk, such as asset bubbles or poor performance?
- Might reduced competition stifle innovation?
- What safeguards are needed to ensure transfers are in members’ best interests?
- Should consumers have access to compensation and legal recourse?
These are weighty considerations. They suggest that, far from having conclusive evidence that consolidation will both unlock investment in UK plc and deliver better outcomes through diversification, the Government is still searching for certainty that its proposals will deliver what’s promised.
When scale outweighs choice
As the consultation notes, there are currently around 30 master trusts and 30 contract-based providers in the market. It’s unclear why this is considered problematic. There is little concrete evidence to show the market isn’t functioning or that existing providers would even choose to invest in the areas the Government is targeting.
In the meantime, this diversity fosters healthy competition — offering employers and savers choice as providers compete on returns, cost, features, service quality and support. These are all key ingredients in the regulator’s Value for Money initiative.
When viewed through that lens, scale isn’t everything. Some of the most innovative schemes have less than £10bn in assets under management and are unlikely to hit the £25bn mark by 2030 — a milestone currently reached by only three master trusts.
Does bigger really mean better for savers?
A central claim behind consolidation is that larger schemes will deliver stronger investment performance. But this is not supported by the Government’s own evidence. Research cited in Pension fund investment and the UK economy shows that three of the four largest funds achieved below-average returns (4–7%), while the four smallest returned 8–12%. Not exactly a ringing endorsement of the ‘bigger is better’ argument.
Big doesn’t always mean better. Larger doesn’t guarantee more diversification. And less competition won’t necessarily mean better outcomes for savers
The regulators’ proposed joint Value for Money framework is intended to improve the current market by empowering sponsors to challenge underperformance from investment consultants and fund managers. If this works, consolidation may follow naturally, driven by market forces rather than mandates.
There is, too, an irony in the Government’s push for the FCA to adopt a growth objective, on top of its existing and sometimes conflicting duties to protect consumers, supervise firms and promote competition.
All of this points to an underlying truth: the main objective of consolidation appears to be boosting UK investment, particularly in sectors where the Government hasn’t generated sufficient market interest. If these areas were genuinely attractive, investment would already be flowing. Forcing it risks undermining the principle of investor-led decision-making.
Big doesn’t always mean better. Larger doesn’t guarantee more diversification. And less competition won’t necessarily mean better outcomes for savers. These members are already the backbone of the UK economy, and these proposals risk asking them to shoulder even more of the burden.
Rory Gravatt is life & pensions director at Altus Consulting
