When Dr Beaching cut thousands of miles of our rail network, he was thinking of a different world – where cars would take us on the journeys that public transport then offered. He was right, the rise of car ownership has meant that the passenger network he slashed has moved on. What is left is nostalgia and a little heritage which serves the purposes of those who still remember lines like the Slow and Dirty, that my Dad used to take me on as a little child.

Somerset and Dorset – North Radstock

This came to mind while I was looking at this chart from the Pensions Regulator

You get the picture, TPR claiming that they are doing a “Beaching” on the network of little schemes that are problematic to administer, expensive to run and (in TPR’s opinion) should close.

Steve Webb commented on X

Number of small schemes continues to decline steadily, largely regardless of government activity!

I think this a little hard on Government who have intervened to recreate the market since 2012 with considerable effect. While the headlines were that the rate of consolidation was slowing, this was infact only for the larger occupational schemes with more than 5,000 members. Small schemes continue to be uprooted like the tracks of Dr Beaching’s victims.

So are we getting better value for money as a result of this consolidation?

There are two causes for inefficiency here.

Value for employers

The first is the cost of running the schemes, a cost that that is born by the employer. This cost includes the need to employ advisers, trustees and comply with the various strictures of the Regulator (including paying levies to meet Government costs).

The headline is misleading

Consolidation is only slowing at the large end. We are seeing some 5000 + member schemes consolidating (like Siemens this month) but not many – this is to be expected. What matters is the small workplace schemes (100 -5,000 members) and these are collapsing. This is good news for the economy and pensions as it frees up “scheme costs” to be redeployed to increase net cashflows for corporate investment and good for pensions, if the money is redirected into higher pension contributions. There is no evidence that small schemes, when they fold into master trusts pass on the scheme cost savings in staff contributions but we’ll come onto member benefits next. It is not for Government (or me) to tell employers how to deploy cost savings from folding small pensions.

We should note that if you exclude micro schemes (SSAS and EPPs mostly) there are now only 1220 own occupation DC schemes left of which only 130 have more than 5,000 members. Strip out the master trusts and we discover around 100 large occupational DC schemes and only 1100 DC schemes in TPR’s target market – left to consolidate.

The message is clear, the consolidation process (for occupational schemes) is closer to completion than commencement. Consolidation is only slowing at the top end, where there is little need to consolidate and it’s going very nicely further down scheme size

Value for members

The second and more obvious benefit of scheme consolidation is that it brings down member costs and should improve the investment outlook for member pots. It might in time also mean more pots get turned to pensions (if large schemes grasp the decumulation nettle).

Here the proper metric is not the number of schemes but the disposition of assets

I do not want to belittle the assets in micro schemes but at £277m at the beginning of the year,they are down three quarters on twelve years ago and represent about 2% of the overall DC pie.

While the £152bn in 5000+ member DC schemes is split between single occupational schemes and master trusts, it so overwhelms what’s left in the remaining 25,000 other schemes (11oo excluding SSAS and EPP), that TPR might well argue “job done” or at least “work well in progress”.

The extraordinary increase in assets in larger schemes has happened despite the disastrous 2022 and demonstrates the economic value of DC is down to little more than 100 schemes. The message to Government is clear, if you want DC to deliver more, then you now have a manageable constituency to deal with.

Members are now likely getting considerable value in terms of what they are paying (relative to the charge cap). The trick now is to make sure they get value in terms of what schemes will be paying them in retirement (the member outcome).

In summary

By hook or crook, consolidation is well underway. This analysis does not take into account stranded assets in contract based DC pots (an FCA problem) , nor does it look at what is happening to the £277m in the 24,000 micro DC schemes, but it tells Government and us  what we need to know.

The job now is to convert the £152 bn held within the top 130 schemes into pensions and to use the money productively , not just in the member’s interests but in the interest of society as a whole.