Since winning the election, the Government has cracked on with pension reforms – all with an overriding ambition of generating UK economic growth.
The joint Treasury and Department for Work and Pensions consultation, 'Pension Investment Review: Unlocking the UK pensions market for growth', which closed on 16 January 2025, proposes measures to drive consolidation in the fragmented workplace pensions market, build scale, and improve member outcomes.
The Government is considering the following measures:
- Introducing thresholds for default funds/arrangements
- For contract-based pensions, enabling contractual override for bulk transfers without member consent
- Placing new duties on employers to consider the overall value when selecting schemes
- Regulating EBCs and corporate advisers when advising employers
In this article, I’ve set out the consultation’s proposals, along with Aegon’s thoughts, which we included in our response.
Pension Investment Review: the background
Soon after taking power, the Government launched a landmark pension review, aiming to ‘boost investment, increase pension pots and tackle waste in the pension system’. The first phase, focusing on investment, began in August 2024, while the second phase on pension contribution adequacy appears to be delayed.
The Government is moving quickly to include legislative changes in the upcoming Pension Schemes Bill, due in Summer 2025. After a Call for Evidence that lasted only three weeks, the Government published an interim report and new consultation paper ‘Unlocking the UK pensions market for growth’ in November 2024, coinciding with the Chancellor’s ‘growth’ Mansion House speech.
The paper outlines a vision for ‘fewer, bigger, better-run pension schemes’ with the scale and resources to invest in a wide range of assets, delivering better member outcomes. The Government believes these ‘pension megafunds’ could unlock £80bn of UK investment, though it won’t initially mandate DC funds to be more UK-focused. However, further interventions may be considered if proposed measures don't boost UK pension investment sufficiently.
Achieving scale in the DC market
The consultation proposals are aimed at multi-employer pension schemes, such as Master Trusts and GPPs, by mandating:
- Minimum size of £25-50 billion assets under management for default funds/arrangements
- Maximum number of defaults per scheme/provider
The proposal is that these targets should be met by the early 2030s and will likely drive consolidation of multi-employer schemes. The Government believes achieving scale will open up investment opportunities, allowing more diversified investments, including in UK productive finance – which it hopes will improve member outcomes long-term.
It’s clear that the primary objective is to achieve scale so pension schemes have the potential to invest to support UK growth, rather than on member outcomes.
The Government also needs to be much clearer on whether scale should be at default fund, arrangement or provider/scheme level. We firmly believe that it’s scheme or provider scale which is likely to lead to better governance, economies of scale and improved bargaining power on price of investment. Scale at this level also grants access to a wider range of assets including productive assets, in house or externally, for example through long-term asset funds (LTAFs).
There will be consequences of setting a maximum number of defaults per multi-employer scheme. Setting it too low could limit employer choice and future innovation.
Instead of legislating for a hard and fast minimum default size and a maximum number of defaults, we believe the Government should set out its strategic direction with regular dynamic reviews.
To do this, and to avoid a capacity crunch and chaos, it will need to understand how the market overall will react to the proposals and if these reactions ‘fit together’. They could do this by carrying out a survey to find out how all DC pension schemes and providers are planning on responding to both the scale proposals and Value for Money (VFM) Framework, as well as their plans to invest in productive assets.
Single employer trust-based schemes: Value for Money Framework
The 1,100 single-employer trust-based schemes are exempt from the ‘Unlocking pensions’ scale proposals. However, the incoming VFM Framework is likely to force many poorly-performing trust based schemes to wind up and consolidate into larger multi-employer schemes.
Set to be included in the Pension Schemes Bill, the VFM Framework will apply across all workplace DC schemes – probably from around 2027/8 – initially targeting default arrangements.
That said, we anticipate that for multi-employer schemes, the VFM Framework will be less impactful as their priority will be meeting the scale requirements under the 'Unlocking Pensions' proposals.
Contractual override for personal pensions
We want to see all pension members saving in modern, value-for-money schemes. A barrier is providers needing individual member consent to transfer existing contract-based personal pensions to new arrangements. Currently, this is challenging, time-consuming and largely unsuccessful as many disengaged savers don't respond. This would be hugely problematic if schemes and funds must close under the Value for Money Framework.
Trustees are able to make bulk transfers without members’ consent, provided they act in the best interest of members and take advice.
The proposals to allow contractual override will level the regulatory playing field, enabling providers to bulk transfer without member consent to another contract or trust scheme, all with member protections and following detailed analysis. The consultation proposes independent third-party experts, such as Independent Governance Committees (IGCs), would agree or block transfers.
However, this would fundamentally change how IGCs operate and govern, having no current fiduciary responsibilities or executive powers. An IGC role currently is to provide governance oversight. Practically, IGCs would need more time, assisted by expert advisers, to determine if bulk transfers are in members' best interests.
New duty on employers
One key theme running through the consultation is exploring measures to shift focus from price to overall value, building on the VFM Framework. The consultation ponders whether a new duty on employers to consider the scheme's overall value at selection and review it every three to five years could drive this change.
It explores extending auto-enrolment duties to include this value-focused duty, utilising the Framework outputs. Alternatively, larger employers could nominate a Board executive responsible for ensuring good retirement outcomes and stimulating regular value reviews.
Neither of these proposals are likely to be practical apart from for the very largest employers, but they could help move employers’ pension provision decisions from being based largely on cost towards value and retirement outcomes. Many would require the help of advisers or EBCs.
Regulating EBCs and corporate advisers
Many employers rely on employee benefit consultants (EBCs) or corporate advisers for their expertise. While advice to individuals is FCA-regulated, advice to employers, including on investments, remains unregulated.
The consultation explores regulating this space to shift such advisers' focus from cost to value, enhancing standards and expertise. The Competition and Markets Authority had previously flagged the need for regulation here. The Government is keen for advisers to prioritise value over cost and promote investment diversification, including in productive assets.
There may be merit in exploring this further. But the downside is that greater regulation would increase EBCs and corporate advisers’ cost base, making advice more expensive, and therefore less accessible to employers, trustees or IGCs.
What’s next?
There's still a long road ahead. Following the consultation closure on 16 January, the Government is expected to publish its final pension investment review report this Spring. This could outline the minimum default size, maximum number of defaults per multi-employer arrangement, and the timeline to achieve this, although as explained above, we hope they instead provide an indicative direction rather than hard and fast numbers.
The Pension Schemes Bill, publishing this Summer, will spell out any necessary legislative changes, with finer details in secondary regulations. The FCA will likely need to introduce new safeguards enabling bulk transfers without consent via rule changes.
Optimistically, new rules and regulations could be in place in 2026 and effective a year later. Realistically though, consolidating the UK's fragmented pension market is a mammoth undertaking that could easily stretch well into the 2030s.
What does this mean for EBCs and corporate advisers?
While details may evolve, the policy direction is clear – the transition towards fund and scheme consolidation begins now. The scale measures will accelerate consolidation among Master Trusts and GPP providers. Once in place, contractual override provisions will enable providers to consolidate default fund estates.
The VFM Framework will encourage, or in some cases force, consolidation of trusts into larger, better value multi-employer arrangements.
Multi-employer schemes will need to consider growth plans to meet Government targets, while own trusts will need to consider how to react to the Framework. Demand for skilled EBCs and corporate advisers will soar as they guide providers, employers and trustees on the journey to scale and better retirement outcomes.
Undoubtedly, the pensions landscape will look very different in 10 years’ time, and advisers are well-placed to support trustees and employers in this journey.