Stay informed with free updates
Simply sign up to the Pensions industry myFT Digest — delivered directly to your inbox.
UK pension managers have objected to government plans to force the creation of a series of “megafunds”, arguing it could stifle competition and hamper investment returns.
Fund managers say that the government should focus on optimising value for savers rather than applying an “arbitrary” scale test for pension funds that could discourage new market entrants and force some funds to merge with underperforming peers.
The criticisms come after the government said last year defined contribution (DC) workplace pension schemes should consolidate in order to reach to at least £25bn in assets per fund by 2030. Ministers hope this will boost investment into British infrastructure and fast-growing companies and lower the operating costs of the funds.
But industry figures warn of unintended consequences of applying a scale test and are sceptical it would achieve the government’s aims of better fund performance and higher investment in domestic assets.
“We’re obviously supportive of scale benefits but what we don’t want to do is create an oligopoly . . . we are concerned that with what’s being proposed competition and innovation will suffer and we’ll end up more like a utility market where there’s a lot of issues as we know,” said Jamie Fiveash, chief executive at Smart UK and Ireland, one of the most acquisitive DC pension schemes.
The UK currently has around 60 multi-employer DC pension schemes with combined assets forecast to reach £800bn by the end of the decade. In a consultation that closes later this week, the government said its proposals would result in a “much smaller” number of schemes.
Chancellor Rachel Reeves said the proposals, together with merging the assets of local government pension funds, would unlock up to £80bn for investment in UK infrastructure and small scale-up companies.
However, pension managers have questioned the government’s methodology, which compared UK defined contribution funds — which are estimated to have about 4 per cent of assets in private equity and infrastructure — with Australian superannuation funds, which tend to be larger and have 13 per cent across the two asset classes.
“The Australian system has had years to carefully select its opportunities and evolve its structures . . . you don’t get the benefits of scale by just squashing people together and saying there, it works,” said Steve Charlton, managing director at SEI Institutional Group, which runs a master trust with about £4bn of assets.
Some of the smaller master trusts already have a high exposure to private equity and infrastructure assets. About a quarter of TPT’s £4bn DC pension assets are invested in private markets, while Natwest’s Cushon, which has assets of £3bn, has a target allocation of 15 per cent for private markets in its default strategy.
“We are sceptical that reaching these arbitrary scale bars would automatically result in the level of productive investment rising . . . if that is the government’s objective they should focus on that,” said Ruari Grant, policy lead at the Pensions and Lifetime Savings Association trade group.
Grant warned that the proposals were already having an impact on the market, with some advisers taking smaller schemes off the lists they recommend to employers on the grounds they might not meet the government’s scale test in the future.
“We have seen circumstances where the top end of performance is overlooked in favour of those chosen based on scale,” said SEI’s Charlton. “Advisers may satisfy themselves that mediocre is fine.”
Research from the industry publication Corporate Adviser shows that over the past five years a number of the smaller pension master trusts that might struggle to meet the government’s scale test have had better risk-adjusted performance than their larger peers.
“Having any blanket hurdle at a specific level we don’t think is the right way to go — and even if it were we would advocate for phased introduction so people don’t leave the market unnecessarily,” said Nigel Aston, market development lead at Aon DC solutions.
Analysts also warn that the deadline of 2030 is too tight because merging schemes takes several years.
“We are concerned about the pace . . . you need an 18-month to two-year runway [to merge schemes] . . . employers were making decisions on their pension providers almost immediately after the announcement,” said David Lane, chief executive of TPT.
The Department for Work and Pensions said it had set out proposals to “move to a market of larger and better run schemes to boost growth and deliver better outcomes for savers”, but added it would “consider the responses in due course”.
Read the full article here