Is bigger really better? Industry reacts to ‘megafunds’ plan

Reeves will deliver her first Mansion House speech this evening (14 November), and the Treasury has already announced plans to accelerate consolidation among defined contribution (DC) schemes.

The government also wants to consolidate the Local Government Pension Scheme (LGPS) into eight “megafunds”, with a mandate to invest 5% of their portfolios into local assets.

Zoe Alexander, director of policy and advocacy at the Pensions and Lifetime Savings Association (PLSA), said the reforms were a “positive step towards ensuring our system delivers the best value for money for savers”.

“Larger pension schemes can help achieve better outcomes for savers through economies of scale, stronger governance, negotiating power and additional resources,” she said. “We support consolidation where it is in the interests of members and represents value for money.

“These are a positive set of ambitions from the government and for the sector. We look forward to working through the details of the proposals so that they work for savers and schemes.”

Michael Moore, chief executive of the British Private Equity & Venture Capital Association (BVCA), said the plans were “a hugely welcome sign” that the government was making “important long-term decisions to boost investment and growth”.

Moore continued: “Larger, consolidated pension schemes have greater opportunity to invest in higher growth assets, like private capital funds that drive investment into exciting UK businesses while delivering strong-returns for pension savers. Moving quickly from consultation to concrete proposals and implementation will be key.”

Defined contribution megafunds

The PLSA’s Alexander emphasised: “In all cases, and irrespective of the types of pension scheme undergoing reform and consolidation, it is crucial that funds’ fiduciary duty to invest in their members best interests is not compromised.

“Whether the proposals succeed in converting consolidated pension capital into greater investment in UK assets will depend on there being a pipeline of suitable opportunities for pension funds.

“The PLSA has made a series of policy and regulatory recommendations, including fiscal incentives, to encourage that to happen.”

Alison Leslie, head of DC investment at Hymans Robertson, said: “Scale helps provide the ability to access a wider range of asset classes to generate higher returns for members. Scale should improve value for members across all services including investment.

“However, care will need to be taken to progress to this. There must be a clear governance process to ensure decisions are made for members’ benefit. There are many well performing, well governed smaller schemes in existence.

“There is also the risk of stifling innovation if the scale of the megafund is too high and smaller providers, who are currently innovating, are crowded out.”

Lily Megson, policy director at financial advice firm My Pension Expert, said the chancellor’s stated “biggest pension reforms in decades” would not be positive if savers are not involved in the decisions around where they invest.

She added: “Truly meaningful, radical pension reform must address a much broader range of issues that blight the country’s pensions market – such as limited pension engagement, the gender gap, lack of financial literacy, and limited access to guidance and advice.”

An investment ‘leap of faith’

Colin Cartwright, partner in Aon’s UK investment practice, said any UK-based investments seeking pension capital “will need to be able to stand on their own merit from a risk and return perspective”.

Jon Greer, head of retirement policy at Quilter, agreed, adding: “It’s a chicken-and-egg dilemma. Large funds need substantial, reliable projects to generate returns, but the market may struggle to offer enough of these opportunities, especially in the infrastructure sector.

“If too much money chases too few viable investments, the effectiveness of this consolidation could be diluted, with funds potentially forced into riskier or less impactful projects.

“The government will need to work actively to develop a pipeline of investable opportunities that align with the megafunds’ scale and risk requirements.”

Tom McPhail, director of public affairs at The Lang Cat, said the proposals were “great news in theory”, but urged caution over what he called a “leap of faith”.

“Is it safe to assume that all schemes will want to invest in the opportunities they’ve outlined?” McPhail said. “While investment in UK infrastructure is welcome, surely where these schemes invest is down to the trustees and they may have other ideas on what will deliver the best returns for their members.”

David Lane, CEO at TPT Retirement Solutions, said: “While scale will inevitably create opportunity, particularly within private markets, trustees will undoubtedly remain acutely aware of their fiduciary duty obligations to their members and focus on the best opportunities agnostic of geography.

“We hope that the government will continue to do its part in developing a good pipeline of investable projects in the UK.”

Further reading

UK pensions: Scaling for success (12 August 2024)

Opperman: Consolidation needs to be harder, better, faster, stronger (4 November 2024)

10 questions that will shape the Pensions Review (5 September 2024)