29 May 2025
If you are covering the government’s Pension Investment Review final report, please find below a comment from Jon Greer, head of retirement policy at Quilter:
“The government has made it clear today that it wants to see a profound shift in the way people’s money is invested for their retirement. Alongside the Mansion House Accord and the proposal to bring in legislative powers to enforce that, today’s Pension Investment Review final report makes it clear that in the workplace pensions market, that it sees bigger as better when it comes to default arrangements.
“Now, there are a lot of default funds out there in the market currently, particularly in the contract-based workplace market and that is going to have to change. Firstly, there is likely going to be a wave of consolidation to create these £25bn megafunds, and this could be at the expense of high-quality, smaller arrangements that are already investing in line with the Government’s aims. Pension engagement by consumers is pitifully low in the workplace pension market despite steps to increase engagement through the use of technology, so the impact of these changes is going to need to be explained thoroughly but simply.
“Secondly, the government is proposing no new default funds can be launched except with regulatory approval. These reforms are ultimately aimed at shrinking what is quite a fragmented market, but some good smaller arrangements will exit. The market will become highly concentrated in a handful of bigger DC schemes reducing competitive pressures. In recognition of this the Government plans to provide a new entrant pathway for those with innovative products, specifically singling out multi-employer Collective Defined Contribution pension schemes which they believe will have a significant role to play in the future. Whether the consolidation of the DC market will see a natural herding mentality toward investment is up for debate but it might be the case that ‘premium defaults’ that some providers offer which typically invest more in private markets and are therefore more expensive diminish. Equally it will be interesting to see if the ‘value’ prescribed to schemes as a tool for recruitment and retention falls if they are all principally seen as offering the same thing.
“There are practical considerations too. This consolidation is going to result in a huge concentration of assets where there is a bulk movement from one arrangement to another. Regardless of what industry you are in, such migrations especially where schemes are winding up, can be long and arduous processes and risk issues cropping up for people when looking to access their funds. Furthermore, the master trust market, where nine pension providers have assets in excess of the £25bn mark, has diverging levels of service standards according to a recent report from LCP. As a result, this path to consolidation is likely to put pressure on existing players and may be bumpy.
“The benefit to people’s pension pots of these changes remains to be seen, but clearly economies of scale should bring about lower prices for investors, and this will be a point to watch closely. The government has stepped back from standardised pricing for default funds, but by no means has ruled it out in the future. Although the Government estimates that it will improve the outcome by an average of £6,000 that figure should be taken with a pinch of salt given the 46-year period over which it is based, a lot can happen in that timeframe.”
