2025 looks to be another busy year in the pensions world, Suzanne Burrell focuses on consolidation in the defined contribution pensions market.

UK Defined Contribution Pensions Consolidation: a look ahead to 2025 

2025 looks to be another busy year in the pensions world, with a continuing number of defined benefit schemes in the private sector looking to secure benefits with insurers.  Funding levels for defined benefit pension schemes continues to be strong, with the combined surplus reported in the PPF 7800 Index reported to be £235bn.  For now, Suzanne Burrell and Paul Carney focus in a two-part article on consolidation in other parts of the UK Pensions systems, specifically consolidation of defined contribution pensions and the local government pension schemes.  In part 1, Suzanne comments on changes afoot for Defined Contribution pension schemes.  

Mansion House 2024 and the Pensions Review

In November 2024, Rachel Reeves delivered her first Mansion House speech.  In parallel to this, the DWP and HM Treasury launched a joint consultation outlining reforms to the defined contribution pensions market. 
The theme of the Mansion House speech was unsurprising for the pensions industry, given the government’s announcement in July of a landmark review of the pensions industry and associated call for evidence  (Pensions Review) to boost investment, increase pension pots and tackle waste in the pensions system. 
The Chancellor expressed support for the pensions proposals made by the former Chanceller Jeremy Hunt during his Mansion House speech in 2023, and the work undertaken by the previous government. She reported that the interim findings from the Pensions Review suggested that these proposals might need to be taken even further to ensure good outcomes for members and the growth of the UK economy. 
The Pensions Review has so far revealed three workstreams for private sector pensions:

1. scale and consolidation in the UK workplace market; 
2. cost versus value in the defined contribution (DC) workplace market; and
3. UK investment and growth.

Following the Mansion House speech, the Department for Work and Pensions (DWP) and the Treasury (HMT) jointly published a consultation document (the "Consultation") setting out proposed reforms to deliver scale, accelerate consolidation and drive a focus on value over cost in the DC workplace pensions market, with the aim of benefiting pensions savers.

The consultation states that there are estimated to be over 1,000 DC pension schemes within around 30 authorised master trusts.  Overall assets in DC schemes could grow to £800billion based on estimates published in the PPI DC Future book.  

Consolidation and scale 

The Consultation focuses on multi-employer schemes, in particular DC master trusts and group personal pension schemes (GPPs). The Pensions Review revealed significant variation in both scheme size and member outcomes amongst these schemes. GPPs in particular present an investment challenge, as they often have multiple default arrangements, which restricts the investing power of each individual fund.  

The first proposal centres on scale in the DC Market with the goal of developing a smaller number of larger schemes.  The consultation views the development of larger schemes as one that will result in better-run schemes leading to improvements in investment returns and operational efficiency.  The stated concern is that fragmentation across larger numbers of default funds limits the ability to invest in productive finance assets.   The stated aim here is to drive more investment in the UK economy.    
The government’s view is that consolidation in the DC world would achieve greater investment diversification through access to a wider range of assets and the power to negotiate lower fees. The government points to evidence from Canada and Australia, where schemes are effectively required to provide a single default fund, resulting in larger, better performing schemes which benefit from economies of scale and offer greater transparency.  Consolidation is also expected to lead to development of large-scale pension funds which have the potential scale and size to invest in significant infrastructure projects.  

To achieve this, the government intends to introduce a minimum size for default arrangements as well as limiting the number of default arrangements.  The DWP and HMT have not suggested a specific number for either proposal. Rather, the Consultation is seeking feedback on what respondents think an appropriate number might be, as well as possible exceptions to the proposed thresholds and other conditions around their application. 

Consolidation: removal of barriers to consolidation

The second proposal is the introduction of legislation to facilitate bulk transfers of assets in contract-based schemes without requiring member consent.  The aim of this proposal is to simplify consolidation but ensure protection for members.  If consolidation is simplified, then the expectation Is that the pace of consolidation accelerates leading to the development of the government’s anticipated ‘mega-funds’.

The appropriate protection for savers would be contained in FCA rules, most likely requiring amendments to the Financial Services and Markets Act 2000 together with introduction of additional powers for the FCA where required for enforcement.  

Safeguards for savers who currently benefit from particular guaranteed annuity rates or investment returns or terminal bonuses will need to be protected or the risk of losing potentially valuable guarantees being mitigated. 

Greater consolidation, particularly on a without consent basis, could lead to further complaints and calls for compensation in the future if it is found that pension scheme members have not received value for money.  The FCA and the Financial Ombudsman Service have issued a call for input regarding reform of the redress framework for “mass redress” events such as compensation following transfers out of the British Steel Pension Scheme debacle.  Andrew Foyle, a partner in our financial services litigation team, has observed that: following the review of the British Steel Pension Scheme mass compensation exercise, “the FCA agreed that there were lessons to be learned including taking a more joined-up approach with the Pensions Regulator."

Savers’ outcomes: Value versus Cost

The third proposal is to move focus away from low-cost pension provision to long-term value and benefits.  Changes may include a change in adviser regulation to ensure that they prioritise value over cost in recommendations.  Additionally, the changes envisage encouraging employer’s to encourage overall value in pension scheme selection.  

One approach explored under the third proposal is introduction of a single price default rather than a cap on default fund pricing.  One of the stated reasons for this is that focussing on price can be at the expense of investment in wider and more diverse asset classes which have the potential to deliver high-returns over the long-term.

Value for money is already on the government’s agenda following the 2023 consultation on a value for money (VFM) framework, designed jointly by the DWP, TPR and the Financial Conduct Authority, to help increase transparency in the DC market, drive consolidation of underperforming schemes, and ultimately produce better outcomes for pensions scheme members.

The new government has confirmed its support for the VFM framework in the proposed Pension Schemes Bill (announced in the King’s Speech briefing paper), but what role will it play if the government’s proposals on maximum default funds and minimum default fund sizes are implemented?

The Consultation says that the new proposals are designed to build upon and complement other measures, including the VFM framework. Indeed, the proposals only relate to multi-employer schemes, they don’t impact single employer schemes at all, so the VFM framework will be needed to drive value and consolidation in respect of those schemes. 

As such, at present it seems that the government is intent on progressing the VFM framework, and we expect to see more details once the Pension Schemes Bill has been published.

&Savers’ outcomes: the role of employers

The Pensions Review found that in general, employers tend to decide which pension provider or product to adopt for their employees based on costs rather than any informed long-term strategy, or the scheme or product’s performance. The Consultation explores the role of employers and their advisers in influencing the focus on cost in the DC pensions market, and its proposals include introducing a legal duty on employers to review their choice of pension scheme on a more holistic basis.  It asks several questions around the benefit of introducing an employer duty, and what, if any, regulation should be introduced in respect of advisers to enable more productive asset allocation.

Next steps

The Consultation closes on 16 January following which the DWP and HMT will take some time to review feedback before providing their response.

The consultation recognises that reducing the number of funds to facilitate scale could lead to restricted competition in the market and potentially limit opportunities for innovation.  The consultation does not really outline how innovation might look.

The consultation also recognises that there may be some multi-employer trusts that are not of a size that meets the scale requirements.  Any regulatory change which encourages or pushes for consolidation will not just apply to single-employer trusts but also to smaller master-trusts.  

The consultation suggests that introduction of a contractual override for individual transfers may also help with implementation of the Multiple Default Consolidator Model.  This Model is to be introduced in the Pension Schemes Bill.  Its aim is to facilitate the automatic consolidation of multiple deferred pots.

For FCA-authorised schemes where an independent governance committee is required, it is possible that the IGC may see a change in their responsibilities if they become the party responsible for assessing whether a without consent transfer is appropriate.  

In the meantime, it is likely that the FCA’s and the Pensions Regulator’s continued focus on governance and value for money assessments in defined contribution pension schemes is likely to lead to continued consolidation into master-trusts from employer occupational pension schemes.  

In addition, the government recently announced a new Pension Schemes Bill to be introduced in 2025.  The aim of this Bill is to improve saver outcomes and increase investment opportunities, particularly within the UK.

It is likely that during 2025, the government will announce the outcome of its consultation on regulations to extend the CDC framework.  One possibility, outlined in the consultation, was to provide at retirement (decumulation-only) CDC options.