The report, “Assessing megafund pension reforms: Insights from international experience”, sponsored by SEI Master Trust and now:pensions (part of Mercer), includes a fresh analysis of international evidence that finds economies of scale typically stem from cost savings rather than higher investment returns. The PPI study identified important differences in factors such as market conditions, corporate structures, and population demographics, revealing that it is not clear-cut UK megafund reforms would necessarily deliver better returns.
Passed in late April, the government’s Pension Schemes Act requires multi-employer Defined Contribution (DC) schemes to consolidate into megafunds with at least £25bn of assets in their main default arrangement by 2030, with limited exceptions.
The report provides a new independent evidence base to better understand the implications of the policy changes in terms of member outcomes, and to inform the details in final regulations, for stakeholders across the sector. (1)
Key findings of the research include:
There is no guaranteed correlation between pension scheme size and level of investment return: The growth strategies adopted by DC Australian Supers have led to lower returns during the five years to 2024 than those of their UK counterparts. Where scale is beneficial, savings typically stem from cost reductions, and while administration and investment fees are falling in Australia, they remain on average higher than the UK charges cap. While the megafund reforms aim to increase investment in domestic private markets, other countries’ experience suggests that the reforms alone may not be sufficient to achieve this.
While some UK DC providers already access the benefits of scale, others may not have harnessed the benefits already available to them: UK pension providers may already access the benefits of scale because they are part of a larger organisation, or via investment opportunities through the use of asset managers with large pools of assets. Further issues to examine in this policy area include where providers fail to harness existing benefits of scale, typically due to not instituting structures enabling effective defaults and common investment strategies. Understanding how new regulations could build on efficiencies already achieved will also be important.
Even before the megafund reforms, there has been consolidation in the UK DC market: Before the Royal Assent of the Pension Schemes Act, the megafund reforms prompted industry responses, with the number of Master Trusts decreasing from 38 to 31 between 2019 and 2025, and stakeholders expect this trend to continue.
Melissa Echalier, PPI Research Associate and lead author of the report, commented: “There is no guarantee that UK megafund reforms will achieve the better returns for savers targeted by government. The PPI’s new international analysis of similar measures, alongside data from stakeholder interviews, paints a more complex picture for return levels and other implications of the reforms. While learning from other countries can be insightful, differences between pension systems make it challenging to draw clear conclusions. In the UK’s fragmented system, the introduction of megafunds will likely play out differently to countries such as Australia and Canada.
“As the sector now prepares for the implementation of these pivotal reforms, this report delivers important new independent insights to the evidence base to support informed policy decision-making.”
Steve Charlton, DC and Solutions Managing Director at SEI, said: “This research makes a timely contribution to the debate on consolidation and scale in pensions. 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 PA and Policy at Mercer’s now:pensions (part of Mercer), said: “As the report shows there are lessons that can be learnt from international comparisons, but each country has differing systems, demographics and markets. The report highlights that scale, private market investment capabilities and cost efficiencies can be achieved in a number of ways. There are also a broader set of factors that influence domestic and private market investment that must be considered. 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.”
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