Consolidation in the UK defined contribution (DC) market, as pension funds scale up to meet government requirements, risks eroding both employer and member influence, according to a report from LCP.
The report – Pension Powerbrokers 2: The DC generation – is based on interviews with 15 senior figures across pension schemes, alongside LCP analysis. It finds that fewer than 50 people now control more than £160bn (€185bn) in occupational pensions.
These are the trustees of the seven largest master trusts, whose collective influence is set to increase further following the announcement of Standard Life’s takeover of Aegon earlier this month.
In most cases, aside from NEST, only around half a dozen individuals are responsible for overseeing very large and fast-growing schemes, Steve Webb, partner at LCP, noted.
The government’s Pension Schemes Bill introduces new scale requirements for DC master trusts, requiring at least £25bn in assets under management within main default arrangements by 2030. The aim is to consolidate the sector into so-called ‘megafunds’ to improve investment in UK assets and member outcomes.
The Department for Work and Pensions (DWP) has also consulted on the future of trusteeship, focusing largely on governance in smaller schemes.
On megafunds specifically, it asked only one question on conflicts where trustees are appointed by the schemes they oversee, otherwise appearing to assume no major governance gaps.
It said: “Our vision for the pension market is that a smaller number of bigger and better pension schemes are overseen by highly skilled trustees operating independently, applying good governance, and focused on delivering the best outcomes for savers without risk of conflicts of interest.”
However, the LCP report warned that the shift towards megafunds – typically serving thousands of employers and millions of members – risks weakening the ‘voice’ of both employers and savers compared with the era of single-employer pension funds.
Interviews highlighted that while independent governance committees (IGCs) can provide scrutiny in group personal pension (GPP) arrangements, providers ultimately retain control over key decisions.
In DC master trusts, trustees risk increasingly “tweaking” decisions already shaped by providers, LCP said, noting that DC providers remain highly influential across the landscape.
The report also points to mounting pressure on trustees, driven by scale and regulatory complexity. Trustees must now respond to the Value for Money (VFM) framework, new scale thresholds, statutory duties on default decumulation, and the government’s ‘productive finance’ agenda, among other requirements.
LCP said independent expertise and challenge will be critical, particularly where small trustee boards are overseeing multi-billion-pound schemes with millions of members.
Webb said: “The increasing concentration of power in the hands of a small number of trustees is extraordinary. Whilst these individuals will be carefully chosen and typically highly expert, the model of having a handful of people overseeing huge ‘mega funds’ raises serious questions which the government has not so far addressed.
“In particular, much more needs to be done to make sure that there is proper accountability of trustees by employers and scheme members, and that there is scope for innovation and challenge in these enormous financial institutions”.
Nathalie Sims, partner at LCP, added: “There is no doubt that the way pension schemes are run will benefit from the current drive to greater professionalisation of trusteeship.”
She noted that overseeing multi-billion-pound pension funds “requires a highly skilled group of people, with access to ongoing training and support”.
“But it is also important that we have structures in place to make sure that there is plenty of independent challenge and advice for these ‘mega fund’ trustees, as well as diversity of thought amongst those who secure these crucial roles in the future of workplace pensions in Britain,” she noted.
