Pensions - Articles - Blueprint for the future DC pensions market

The UK’s pensions system is entering a critical phase of transformation, as the focus shifts from shaping the Pension Schemes Act to delivering stronger outcomes for savers and the wider economy via its implementation.

 

New research published today by Standard Life, in partnership with WPI Economics - ‘From scale to impact: A blueprint for the future DC pensions market’ , sets out how one of the Act’s critical initiatives, a move to fewer, larger defined contribution (DC) pension schemes with a greater focus on long-term value, can be successfully implemented through the adoption of eight key principles. It highlights the potential benefits for savers and the UK economy with changes to investment strategy helping people’s pension savings increase by up to 20% while supporting significant business and job creation across the UK.

 

The research finds that a more diversified investment approach, particularly through greater allocation to private market assets, could materially improve long-term returns for pension savers. Achieving these outcomes will require a significant structural shift to a more consolidated pensions market, with 10-15 large “megafunds” expected to emerge by 2035. Greater scale would enable schemes to invest more effectively across a wider range of assets, particularly private markets, where allocations could rise from around 2-4% today to 15-30% during the growth phase in future default funds.

 

 

Benefits are most pronounced when applied early in a saver’s working life but improvements are evident across all saver types and remain resilient across a wide range of market conditions.

 

Alongside improved outcomes for savers, the research highlights the potential for pensions to play a much greater role in financing UK growth. By 2035, the DC pensions market is expected to reach up to £1.8 trillion in assets. Between £40 billion and £200 billion could be invested in UK private markets under the proposed approach, significantly higher than today.

 

This could support infrastructure investment generating up to £115 billion in GDP, that in turn would underpin 333,000 jobs, and increase investment in UK businesses, supporting thousands of SMEs.

 

With recent Government policy and regulation paving the way for radical pension scheme reform, the report sets out the principles necessary to facilitate a new era of value-focused retirement saving. How these changes are implemented will be critical to delivering the full benefits to savers and the economy. 

 

 

Together, these changes could help the pensions system deliver stronger outcomes for savers while supporting wider economic growth.

 

Joe Ahern, Director of Policy at WPI Economics, said: “Our analysis shows that greater scale and more diversified investment strategies, particularly increased exposure to private markets, can deliver higher returns for savers while supporting infrastructure, businesses and economic growth. The evidence points to a significant opportunity to improve outcomes but realising this will require coordinated action across the market and a regulatory framework focused on delivering higher net value for members.”

 

The research comes as concerns continue to grow about retirement adequacy in the UK, with millions of people not saving enough for later life. Building on its previous review of UK pension adequacy, WPI Economics highlights the need to strengthen both contribution levels and investment strategies, noting that current approaches may be limiting the growth potential of pension savings.

 

Andy Briggs, Group CEO, Standard Life plc, said: “The UK pensions system is at a critical juncture. While auto enrolment has transformed participation, too many people remain at risk of falling short in retirement. “The next phase must focus on how reforms are implemented in practice, ensuring that pension savings are translated into better outcomes through greater scale and a stronger emphasis on long-term value. Getting this right is essential to improving financial security in retirement while also ensuring pensions can support long-term investment in the UK economy.”