Defined contribution (DC) pension pots could increase by up to 20 per cent at retirement if the UK successfully moves towards a more consolidated, value-focused pension system, research from Standard Life and WPI Economics has suggested.

The report, From scale to impact: A blueprint for the future DC pensions market, argued that the emergence of 10-15 large megafunds by 2035 could enable schemes to invest more effectively across a wider range of assets, particularly private markets.

Standard Life said the UK pensions system is entering a critical phase following the passage of the Pension Schemes Act, with attention now turning to how the reforms will be implemented in practice.

The report suggested that, in a future market where individual schemes manage more than £50bn in assets, private market allocations in DC default funds could rise from around 2-4 per cent today to 15-30 per cent during the growth phase.

According to the modelling, a more diversified investment approach could increase pension pot values by between 4 per cent and 20 per cent at retirement, depending on the saver's profile and private market exposure.

Indeed, an early-career saver could have up to £49,000 more in their pension pot in real terms by retirement, equivalent to a 17 per cent uplift compared with current investment strategies.

Under more favourable market conditions, this could rise to as much as £80,000.

In addition, the research found that mid-career savers could benefit, with a 45-year-old saver potentially seeing up to £17,000 more in their pension pot by retirement.

WPI Economics director of policy, Joe Ahern, 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.”

Meanwhile, the report also highlighted potential benefits for the wider UK economy, estimating that the DC pensions market could grow to between £1.3trn and £1.8trn in assets by 2035 if default contribution rates remain unchanged.

Under the proposed approach, between £40bn and £200bn could be invested in UK private markets by 2035, compared with an estimated £2bn-£3bn currently invested in private markets by master trusts.

However, the report stressed that economic benefits should remain secondary to improving savers' outcomes, warning that reforms must focus on maximising net member value.

With this in mind, it set out eight principles for delivering reform, including establishing a clear and consistent regulatory framework, ensuring equal protections for all members, shifting from a cost-focused to a value-focused system, strengthening trustee governance, supporting a universal pensions system and improving access to retirement income.

The report also called for the value for money framework to enable, rather than hinder, higher net member value, and warned that poorly designed benchmarking could encourage herding behaviour among providers.

Standard Life plc group CEO, Andy Briggs, commented: “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.”

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