It is a headline picked up by the VFM podcast last Friday afternoon and it relates to a document produced by the Pensions Regulator to show that innovation is available to smaller schemes looking to compete with the “megafunds”.
I have written over the weekend in similar fashion of the promise of an investment of nearly £100bn by Australia in UK assets
I would like to think that the Mansion House Accord is beating strong for collective pensions that are and have yet to be established; that there will be chances to build a new consensus among collective funds to join the Australians, Singaporeans and Malaysians in finding UK investables.
Here’s evidence of investment opportunities that the fiduciaries of DC schemes have so far missed . The Pension Schemes Act provides them with a backstop, to focus their intent; if they cannot do it as DC funds, perhaps CDC funds will prove easier!
The TPR review – DC consolidation and economies of scale: emerging evidence – brings together evidence on the emerging benefits of scale and complements the Department for Work and Pensions’ (DWP’s) analysis of pension fund investment and the UK economy published in 2024.
While the UK evidence base is still developing and will strengthen over time, this report supplements domestic evidence with insights from Australia, where large-scale DC funds have been established for longer and operate at significant economic scale.
The numbers quoted by TPR show the impact of auto-enrolment so far on the nation with well over 30m memberships of DC schemes. It must be said this doesn’t show those of us in multiple DC schemes, a result of changing jobs over the period, each requiring re-enrolment, but this chart shows that as a nation we are generally saving into DC pots. We find the number of schemes with less than a thousand members is undisplayed this decade, indeed we have very few DC pension schemes with less than 5,000 members.
The assets of these schemes are similarly concentrated in schemes with large memberships
The growth accelerates faster because it shows not just more contributions but the growth of the investments made by the money we and our employers put in.
The prospects of a trillion pounds invested in these funds within 10 years is not unreasonable – that claim was made by TPR’s CEO, Nausicaa Delfas in a speech last week.
Let’s stop focussing on cost and think of opportunity
Sam Cobley of LCP has got it right when he tells Professional Pensions
“TPR notes that single-employer trusts, when supported by appropriate investment advice, tend to have higher average investment returns than the average master trust. More broadly, DWP research found no clear correlation between scheme size and performance for either master trusts or group personal pensions.
I would suggest that the large master trusts invested, until recently, in the same pooled funds as the small DC schemes and frankly the impact of negotiated charges for indexed funds was not sufficient to outweigh smart choice of indexed funds, as advised by (you’ve guessed it) the likes of LCP.
I don’t want to underplay the importance of making good decisions on the pooled funds to use but it only takes you so far. It has taken us this far but we need to go further and investing more ambitiously means moving beyond the current requirements of DC schemes and towards the default investment funds that are being introduced by the Pension Schemes Act. It is also an opportunity for the initially small CDC schemes which aren’t fighting to become “scale” players, though I suspect they will.
Where there is scale is within the large asset management houses who manage collective funds, the LGPS pools and the remaining private DB funds. USS for instance leverages value for its DC members by investing in the DB funds. This can be done where there are collective pensions doing the heavy lifting of finding the investables and creating the agreements to hold these assets over time
I see opportunities for collective arrangements such as those we have in the UK to help the new collectives (collective DC or CDC) to move quickly towards alliances with these large funds that don’t have to go to the expense of unitisation and carry the liquidity that DC schemes need. This is a major reason why CDC schemes are being given an exemption from scale requirements and why they cannot be measured by DC VFM measures. It is no more appropriate for CDC schemes to be treated as small as it is the DC section of the mighty USS. From an investment point of view, CDC should be riding on the skirts of larger and most successful DB investment funds.
This digression into CDC is necessary as it shows DC the way that it must build going forwards.
TPR’s report suggests that master trusts are holding back from investing in UK funds, not because they aren’t available but because they don’t have the freedom (commercial constraints , needing to display consistency with others to maintain herd status for VFM reporting). TPR report that single employer schemes find it easier to invest in the UK!
According to the Pension Provider Survey 2024/25, single employer trust schemes are more likely to invest in UK listed equities than multi-employer providers, e.g. master trusts. For savers at 30 years to retirement, this allocation was 9.9% of assets under management in SET schemes compared with 2.6% in multi-employer provider schemes.
As for adopting the Mansion House reforms in their investment strategies, the megafunds of master trusts have yet to get properly involved. Again this is from the TPR
The ABI tracks progress against the Mansion House Compact. The ABI’s latest update shows that investment in unlisted equities held through DC default funds has doubled since last year, growing from £0.8 billion to £1.6 billion. This increase reveals a growth in funds’ exposure to unlisted equities from 0.36% to 0.6%, marking further progress towards the Compact’s ambition to allocate at least 5% by 2030.
But DC funds are way off the levels of investment in the growth opportunities in unlisted stocks that are found in DB megafunds such as Border and Coast. When I read about the Private markets funds operated by this organisation , offering funds mainly to LGPS, I realise how far ahead DB investment is in this area.
With private market pension funds such as Border to Coast it is deliverable performance over time , not competitiveness on costs and charges that is important. DC funds need to reach out to the collective funds to properly.
