Expert view: Megafunds can bring benefits but care must be taken, says PLSA's Zoe Alexander
The UK pension system is one of the most sophisticated and mature in the world and its schemes play an essential role in supporting the UK economy.
The Mansion House proposals are a positive step towards ensuring our system delivers the best value for money for savers, aiming to consolidate pension assets into fewer, larger ‘megafunds’ to give them greater ability to invest in domestic growth.
Larger pension schemes can help achieve better outcomes for savers through economies of scale, stronger governance and negotiating power.
The Pensions and Lifetime Savings Association (PLSA) supports consolidation where it is in the interests of members and represents value for money.
Defined contribution schemes
In the automatic enrolment market, there are currently around 60 multi-employer schemes, each investing savers’ money into one or more funds.
Total defined contribution (DC) assets are set to reach £800bn by the end of the decade.
The Government’s proposals to set a minimum size requirement for these funds to ensure they deliver on their investment potential has the potential to significantly reshape the market.
The level the Government’s ‘minimum size’ for these funds is set at, and the timeline for reaching it, will be central to the success of this proposal.
The Government will also need to consider how this new proposal will support ongoing regulatory initiatives aimed at improving value for money and encouraging consolidation in the automatic enrolment market.
Local government pension scheme
The Local Government Pension Scheme (LGPS) in England and Wales will manage assets worth around £500 billion by 2030.
These assets are currently split across 86 different administering authorities, managing between £300m and £30bn, with local government officials and councillors managing each fund.
LGPS assets have already undergone substantial consolidation into pools in England and Wales with many positive results, increasing investment in private markets and infrastructure as well as generating cost efficiencies.
With its new proposals, the Government is seeking to accelerate this.
The PLSA supports the completion of the transfer of remaining assets and continued development of the LGPS pool model.
However, care must be taken to ensure this is done in a pragmatic way that is not destructive of value nor incurs unnecessary investment losses or costs.
Fiduciary duty and encouraging investment in UK
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.
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.
