The UK’s Pension Schemes Act could lead to a significant boost in individual pension pots, with research by WPI Economics and Standard Life suggesting a potential increase of up to 20% if consolidation is executed well. The act aims to consolidate defined contribution (DC) providers into a small number of “megafunds” with at least £25bn in assets under management.
Standard Life, which has already reached this mark, believes the shift to a consolidated, “value-focused” DC system could lead to a significant economic boost for the UK and create hundreds of thousands of jobs, as well as improving retirement outcomes. Andy Briggs, group CEO at Standard Life, said the UK pensions system is at a critical juncture.
Success would require clearer implementation of reforms, with a shift from cost to value, supported by a clear and consistent regulatory framework, according to Standard Life. They argue that diversification and scale are key to higher returns, with allocating more to private markets potentially improving long-term returns for pension savers.
At a launch event in London, Matt Burrell, head of public affairs at Standard Life, argued that an allocation of around 40% to private markets is more reflective of the balance of private and public assets worldwide. His report estimated that average allocations within growth default arrangements could increase from around 2% to 4% today to between 15% and 30%.
The benefits of scale would also be recognized through access to bigger ticket investment deals, more preferential terms, and a lower cost of operations and administration as providers become more sophisticated as institutions. Joe Ahern, director of policy at WPI Economics, said that greater scale and more diversified investment strategies can deliver higher returns for savers while supporting infrastructure, businesses, and economic growth.
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Pensions minister Torsten Bell supported the report’s findings, which reinforce the government’s drive to consolidate the DC sector. “Size matters in pensions,” the minister said. “It matters for economies of scale and administration costs, but it also matters for what you can do in terms of asset allocation.”
The DC sector is expected to grow to more than £1.8trn in assets under management by the mid-2030s, with government data indicating that it will eclipse defined benefit assets by the turn of the decade. As it grows and private markets allocations increase, Standard Life’s report estimated that between £40bn and £200bn could be invested in UK unlisted assets such as infrastructure.
Consolidation and scale will play a significant role in shaping the future of the UK’s pension system. With the potential for significant economic benefits and improved retirement outcomes, the implementation of these reforms will be closely watched. The government’s plans are likely to involve a pension dashboard to help savers track their investments.
The Department for Work and Pensions will need to carefully consider the recommendations outlined in the report to ensure the best possible outcomes for pension savers.
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