I remember being in a meeting with Guy Opperman where he asked me and Con Keating what we thought would be optimum size for a Pension Fund. “Somewhere around £500bn” said Con Keating without demur.

That’s what we’ve got in the LGPS pension scheme and if the trajectory of Nest or even People’s Pension, the largest DC funds will be thereabouts within a decade.

Isn’t it time to ask ourselves “what do we value pension fund money for?”.

Con’s response was economic and . He talked of pensions that could be called “wealth funds” as well as achieving value for money for those saving for pensions.

We are only too aware of LGPS and other large pension funds being in surplus. They are investing in growth and creating growth in Britain. To put LGPS – especially some sections such as Border to Coast, through the VFM wringer that DC master trusts are going through, there would be no comparison over time.

When it comes to diversification beyond passive funds investing in public markets , there isn’t much space for small DC funds. For funds of more than £10bn today and £25bn tomorrow, there’s opportunity but it’s not till Nest and People’s Lifesight, L&G and one or two other master trusts exceed £100bn that they can have a chance to compete in performance with large growth facing DB plans.

Opperman’s criticism of VFM as it has become (nearly a decade since he started asking questions about value for our money, is quite right. He said at yesterday’s Pension PlayPen that his original intention was to rid us of NOW pensions which was then and is now a lagger when it comes to delivering good outcomes. He didn’t get his way and if you’re in NOW – hard luck. The coffee morning was held with Australians who are quite used to losing non-performing Supers and non-performance in a number ways (see the bottom of this blog which was offered me by blogger’s most prolific commentator John Mather.

We are going to have a car crash because we have limited the measurement of VFM to actuarially decided performance measures that do very little to tell us what will happen going forward and not much about what has happened to our pot.

We are also ignoring the problem of turning pots to pensions and focussing just on how our money grows before we have it back (as if the last 30 years of our pot’s life doesn’t matter as an investment. Working out if the DC “pension” plan is offering reasonable pensions is still too hard for VFM which has been under discussion for a decade.

Only on one thing do I agree with the current version of VFM. That is that when we get to £100bn funds I would expect very little spread in performance , but instead a herding in investment strategy and returns. This is because when you get big, you have markets that you cannot avoid and the highs and lows that markets give without the opportunity be that different from anybody else. Does this dispersion mean bad news for pensioners, I don’t think so. If we don’t get herding with size, I’d be disappointed. There is space for all pension funds to collectively deliver . This make markets including the UK grow!

Appendix – VFM testing in Australia

Can the Australian model bring us more VFM in our DC pots?

Thanks to to John Mather for this summary of what we’d call VFM testing  in Australia. It’s a brutal system and one that may be adopted here if what’s being introduced as VFM in the UK turns out to be what Guy Opperman calls a “train crash”

Regulatory Background: Consolidation and “Benchmark Hugging”

Under the Australian Prudential Regulation Authority’s (APRA) prudential framework and the Your Future, Your Super (YFYS) legislation, funds face mandatory consolidation pressures. While APRA does not enforce an arbitrary, statutory asset-size ceiling, it subjects trustees to strict annual Business Performance Reviews (SPS 515) and the statutory Annual Performance Test. Funds lacking the scale to deliver low administration fees, or those that underperform their asset-class benchmark by more than 50 basis points (-0.50% p.a.) over rolling measurement windows, are legally blocked from receiving new default members and effectively forced into successor fund transfers (SFT mergers).

How Scale and Testing Have Impacted Performance

• Incentive to “Hug” Benchmarks: The asymmetric penalty of failing the APRA test (product closure/reputational ruin versus modest reward for outperformance) has forced mega-funds to tightly manage tracking error. Industry research shows funds have reduced implementation tracking error toward 1% or less.
• Quasi-Tracker Portfolios in Listed Equities: To prevent asset-class tracking deviations, the listed equity sleeves (both Australian and International Shares) of major default MySuper options are now largely managed as low-tracking-error, passive or enhanced-index portfolios.
• The “Scale Trap” and Internalization: Funds exceeding AUD $100B–$300B in assets under management (AUM) cannot easily run active, high-conviction listed equity mandates without incurring market impact costs. Consequently, funds have internalized passive asset management to reduce fee drag.
• Unlisted Assets as the Primary Alpha Driver: Rather than pure index trackers, Australia’s largest funds function as barbells: broad, low-cost indexed public equities on one side, paired with heavy direct allocations (often 20% to 35%) to unlisted infrastructure, real estate, and private equity.

Net Returns in Excess of Inflation (Top 5 Providers)

The top 5 superannuation trustees by MySuper/default assets under management are AustralianSuper, Australian Retirement Trust (ART), Aware Super, Hostplus, and UniSuper.

Most default MySuper balanced/growth options target a long-term real return of CPI + 3.0% to CPI + 4.0% p.a. over rolling 10-year periods. Over the 10-year period ending in 2026, headline Australian CPI averaged approximately 3.0% p.a. (reflecting the post-2021 inflation surge normalized over a decade).

The table below outlines the 10-year annualized nominal returns and the net real return (excess over inflation) for the flagship default options of each top 5 provider:

Superannuation Provider	Flagship Default / MySuper Option	10-Year Annualized Return (p.a.)	Benchmark Inflation (10-Yr Avg CPI)	Return in Excess of Inflation (Real Return % p.a.)
AustralianSuper	Balanced (Default)	8.47%	~3.0%	+5.47% p.a.
Australian Retirement Trust (ART)	Super Savings Balanced	8.69%	~3.0%	+5.69% p.a.
Hostplus	Balanced	8.55%	~3.0%	+5.55% p.a.
UniSuper	Balanced (MySuper)	8.35%	~3.0%	+5.35% p.a.
Aware Super	Lifecycle / Balanced Growth	8.15%	~3.0%	+5.15% p.a.

Note: Returns are net of investment fees, administration costs, and superannuation taxes.

Core Findings on Long-Term Real Performance

1. Exceeding Long-Term Objectives: Despite concerns regarding benchmark-hugging in listed equities, all top 5 providers delivered real returns between 5.1% and 5.7% p.a. in excess of inflation over the 10-year period, substantially outperforming their baseline mandate targets of CPI + 3.0% to 3.5%.
2. Fee Reductions from Scale: APRA’s forced consolidation and the resulting economies of scale lowered standard administration and investment fees from an average of ~1.10% to under 0.65%–0.75% across the largest providers, directly feeding into net compound real returns.
3. The Emerging Challenge: While the index-heavy, low-tracking-error strategy was aided by strong global equity bull runs over the past decade, Treasury and industry groups (including the Actuaries Institute and Conexus) have warned that the current test mechanics disincentivize counter-cyclical investing or opportunistic venture capital due to short-term benchmark divergence risk.