UK – The UK pensions regulator should be allowed to force the merger of small defined contribution (DC) funds unable to deliver low-cost pensions, the opposition Labour party has insisted.

In a speech to the Birmingham Chamber of Commerce less than two weeks after the party published a detailed policy paper on pensions sponsored by the National Association of Pension Funds, shadow work and pensions secretary Liam Byrne called for the UK to learn from the Australian approach to regulating the superannuation industry.

His suggestion that scale is a necessity echoes comments from Pensions Regulator (TPR) chairman Michael O’Higgins late last year.

At the time, O’Higgins warned that workers should not be auto-enrolled into small funds lacking the benefit of scale.

Byrne repeatedly questioned the fairness of aspects of the coalition government’s reforms to the state pension.

He said that if it believed an income “shortfall” created by the single-tier pension reform for young workers should be corrected through private savings, then it needed to correct “flaws” in the design of auto-enrolment.

He added that, in the absence of the state second pension (S2P) – the second pillar of the state pension to be abolished under the forthcoming reforms – workers should instead be allowed to save for retirement with the National Employment Savings Trust (NEST).

However, Byrne noted the government had shown “no interest” in embarking” on a number of reforms his party deemed necessary, including lifting restrictions on pot transfers into NEST and an annual contribution limit that he said meant employers opted against using the fund launched to act as pension provider to employers unable to find a viable private sector option.

The MP said the biggest single problem facing the UK pension market was its “fractured” nature.

Speaking of smaller DC funds, he said: “I do not believe they have the scale either to offer savers the best investment decisions, or the lowest charges, and so we have to look at how we foster an industry or bigger, simpler, cheaper pension funds.”

He said Australia’s 2010 review of the superannuation system, chaired by former Australian regulator Jeremy Cooper, that introduced the MySuper default fund and mandated regular cost-based reviews of schemes offered an example of how to reform the UK’s system.

Byrne said Labour would argue for a legal requirement on all pension funds to “prioritise the interests of savers over shareholders” – a likely reference to contract-based arrangements, but also concerns over conflicts of interest within master trusts affiliated with a single asset manager.

He further backed trust-based funds, saying these “most effectively delivered” pensions.

Byrne added that trustees should have a duty to examine whether funds can deliver low costs through the existing scale, and examine if mergers would be beneficial – echoing regular reviews funds in Australia must now undertake to assess the value provided.

“Third,” he said, “regulators should be empowered to mandate small schemes to merge, as is done in Australia.”

The outgoing head of the Pensions Regulator Bill Galvin has previously said it was “unlikely” to be granted powers to bring about consolidation, a change the NAPF has repeatedly backed.

However, the regulator has recently outlined stricter regulation of master trust schemes and spoken of plans to penalise funds that fail to comply with minimum cost standards.