The UK government’s drive to consolidate pension schemes into megafunds will not automatically result in higher investment returns, according to research from the Pensions Policy Institute (PPI).
Under the Pension Schemes Act, passed in April, multi-employer defined contribution (DC) schemes will be required to consolidate into megafunds with at least £25bn in assets in their main default arrangement by 2030, subject to limited exceptions.
The reforms are intended to increase scale across the pensions sector, with the government arguing that larger schemes will unlock billions of pounds of domestic investment and support UK economic growth.
However, PPI’s report, Assessing megafund pension reforms: Insights from international experience, sponsored by SEI Master Trust and NOW: Pensions, found no guaranteed relationship between pension scheme size and investment returns.
According to the report, the growth-oriented investment strategies adopted by Australian superannuation funds generated lower returns over the five years to 2024 than those achieved by their UK counterparts.
It added that, where scale delivers benefits, these are typically linked to cost reductions. Although administration and investment fees have fallen in Australia, they remain, on average, higher than the UK’s charge cap.
PPI said that while the reforms are intended to encourage greater investment in domestic private markets, international experience suggests that scale alone may not be sufficient to achieve that objective.
The report also noted that some UK pension providers may already benefit from scale through membership of larger organisations or by accessing investment opportunities via asset managers overseeing substantial pools of capital.
It identified further areas for consideration, including cases where providers fail to capture existing scale benefits because they lack structures that support effective default arrangements and common investment strategies.
The report added that policymakers should consider how new regulations can build on efficiencies already achieved within the market.
Melissa Echalier, research associate at the PPI and lead author of the report, said: “There is no guarantee that UK megafund reforms will achieve the better returns for savers targeted by the government.”
She added that while learning from other countries can be “insightful”, differences between pension systems make it difficult to draw direct comparisons.
“In the UK’s fragmented system, the introduction of megafunds will likely play out differently to countries such as Australia and Canada,” she said.
Steve Charlton, DC and solutions managing director at SEI, said: “Too often, size is treated as a proxy for quality, when the evidence shows the relationship between scale, performance and outcomes is more complex than that. Scale can provide useful capabilities, but it is not an outcome in its own right.
“What ultimately matters is whether pension schemes deliver good value and more savings for members to spend in their retirement, and this research helps bring that focus back to the fore.”
Lizzy Holliday, director of public affairs and policy at NOW: Pensions, said that scale, private market investment capability and cost efficiencies can be achieved in a number of ways. She added that a broader range of factors influencing domestic and private market investment should be taken into account.
“It will be important to take these into account at the next stage of policy and regulatory development to support delivery of good member outcomes,” she said.
