The drive to consolidate DC pension schemes is no bad thing.

God is on the side of the big batallions – not a universally held belief

The idea that “big is better” is not a universal truth, in the 1970s thinkers such as EF Schumacher said “small  is beautiful” an idea that is still popular for millions of us who till allotments or run businesses out of our backrooms.

But in less artisan arenas, especially the areas of tech, pharma and finance, the  attraction of big data , of global healthcare programs and of the mega-bank have prevailed.

In this blog, I argue that for most people, consolidation helps and for those who want to do things themselves, their are self-investment options a plenty.

Banks, insurers and fund managers have consolidated faster than they have proliferated so that in Britain we have dispensed with almost all of out system of building societies and rendered irrelevant the small mutual insurers.

There are three principal benefits

  1. Scale; services can be purchased in bulk and offered to consumers consistently – bringing down unit costs to providers – to the benefit of consumer or shareholder.
  2. Governance; the LDI fiasco was most intense with small schemes that could not manage their liquidity and often found they had lost their “hedges” after the fact
  3. Regulatory risk; regulators argue that it is hard to police small entities and while innovation is encouraged, consolidation of innovators is seen as a logical second step

It’s hard to argue against consolidation as a trend, it is happening in other countries and some – such as Australia – are claiming that penson consolidation is now delivering to all parties.

The concern over consolidation is that it could, un-supervised – benefit the consolidators and not those whose benefits are being consolidated. The idea that the 7200 corporate defined benefit schemes could eventually become part of a handful of insurers , the PPF and maybe a couple of superfunds has limited appeal, if the price of that consolidation is the loss of “trapped surpluses” that pay to shareholders of providers and advisers and not to pensioners.

In the area of corporate defined contribution funds, consolidation is touted as allowing large schemes to access more lucrative long-term investment opportunities , but this can – and is – countered by arguments that small schemes know their members and achieve more nuanced engagement, that scale can be obtained through pooled funds and that regulatory arguments are over-played.

While these arguments are made by trustees and their advisers, we hear little protest from members of consolidated DC schemes, from unions or from regulators. Without issues relating to discretionary benefits , DC members have little to lose and much to gain from consolidation. This is especially the case where employers share the savings of not having a scheme to run, through higher contribution rates.

Small wonder then that the Government sees DC consolidation as an easy political win. Not only does it reduce costs and standardise service, but it offers larger schemes the scale to invest more productively in patient capital. Much of the DWP, TPR and FCA’s energy has been put into creating a system of consolidation that nudges rather than mandates, but as time goes by, that is changing.

Initially the Government set the bar for DC consolidation at £100m in scheme assets, but the second iteration of its VFM proposals has moved to a position that no scheme is too big to fail. It is quite possible that several established master trusts would fail a test on performance, the apportionment of costs and on service quality. The DWP has made no bones about it, failing schemes will be required to consolidate. The Pensions Regulator may not be need to use a stick, it is likely that most schemes will voluntarily hand over the keys rather than face the humiliation of forced closure. However forced closure is going on in other parts of the world – especially Australia.

The drive to consolidate is made easier if there are clear metrics to compare one scheme with another. For employers – one clear metric is cost – it costs nothing to participate in a multi-employer scheme , by comparison with the ongoing costs of maintaining a scheme just for its own staff. For “own schemes” to justify themselves, they need to clearly demonstrate greater value – not just equivalent value – to a master trust of GPP.

The wise employer will take into account strategic of “forward looking” measures, such as the capacity of a scheme to innovate to meet more strenuous demands from consumers and more taxing reporting to regulators. While the argument for maintenance of the status quo might work for 2023 – will it work in five or ten years time?

It is likely that many members, especially those with large pots and the capacity to take advice, will look to self-manage and dispense with a one size fits all , consolidated solution. We have seen this happen around the world , not least here in the UK where wealth management makes a virtue out of managing each client individually.

The temptation is to see this trend as scaleable. Advisers argue that there are insufficient resources to plug the advice gap while consumerists point out that most of the non-affluent majority neither want of need bespoke advice or fund management

So long as the mass-affluent has the capacity to walk away from consolidation , arguments that consolidation is not in the consumer interest are likely to be considered “special pleading” amongst politicians and regulators.

Individuals have the choice to stay or go, but for most employers, the days of running a small scheme – of whatever hue, look like they are drawing to a close.

Who benefits from consolidation? By and large the more vulnerable , less sophisticated savers who are least able to look after themselves.

Do these more vulnerable savers see scheme consolidation that way – no. Most continue to see their pensions as broken. Multiple pots – many lost – many findable on multiple systems – is no way to manage later life finances.  The consolidation that savers look forward to starts with a consolidated view on a pension dashboard and leads to a single consolidated pot called a “pension”.

But for now, scheme consolidation is a good start.



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to The drive to consolidate DC pension schemes is no bad thing.

  1. Dave C says:

    Consumers won’t protest or suffer at the thin end of the wedge.

    Let’s imagine one day that after all is consolidated, SIPP are also consolidated. It’d be then when I complained, having no choice but to pay a profit driven, shareholder driven business, existing in a government legislated oligopoly, whatever they demand in fees.

    If government legislate out competition and create policy to regulate profit making to fair levels, what is the point of it being a private enterprise any more?

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