Whilst industry experts have broadly welcomed the objectives behind the government's plans to introduce defined contribution (DC) megafunds, concerns around the proposed approach, unintended consequences and "challenging" timelines have been raised.

Chancellor, Rachel Reeves, previously announced plans to create pension megafunds in her inaugural Mansion House speech, as part of a "radical" set of pension reforms designed to unlock billions of pounds of investment in infrastructure and local projects.

In its response, the Society of Pension Professionals (SPP) said there is a consensus that the industry can "still do more and is very much committed to doing so, as evidenced by the generally positive manner in which most of the industry has reacted to government announcements on the need for an increased commitment to productive finance”.

However, the SPP warned that “some of the current proposals are likely to have unintended consequences for scheme members, whose interests we believe should be at the heart of any pension policy reforms”.

In particular, it argued that it is "unclear" if a minimum pension fund scale of £25bn assets under management is needed or that scale alone will drive any substantial additional investment in UK productive assets, let alone deliver better saver returns.

Broadstone's response echoed this, noting that while the focus on productive finance is framed as providing a clear benefit for scheme members, the evidence is not clear that this is the case with the Government Actuary Department’s own modelling showing only marginal benefit.

"We aren’t convinced that these proposals are the best way to achieve this," SPP president, Sophia Singleton, said.

"A minimum pension fund scale of £25bn AUM isn’t necessarily going to drive additional investment diversification or deliver better saver returns but could lead to unintended consequences of reducing competition, stifling innovation and potentially disadvantaging some minority groups."

These concerns were also highlighted in the Pensions and Lifetime Savings Association's (PLSA) response, which, whilst supportive of the aims behind the reforms, raised queries around implementation issues, unintended consequences and "challenging" timelines.

In particular, the PLSA shared the SPP's concern that the DC scale test as designed will not, on its own, deliver the government’s core objective of increasing investment in UK productive assets and may have unintended consequences.

The PLSA also warned that there are "numerous drawbacks" associated with the minimum size requirements for DC funds related to both the level proposed and the timeframe for meeting it, especially when wider reforms in train are considered.

In addition to this, it raised concerns about the risks of market disruption and loss of schemes which are performing well, delivering good member outcomes, and already allocate to productive assets.

Hymans Robertson head of DC markets, Paul Waters, agreed, emphasising the need to ensure that any requirement to consolidate does not "stifle innovation" in the DC marketplace.

“The consolidation journey that the pensions industry is on already, together with the ideas proposed in the consultation, will result in a number of very large arrangements with many of the attributes required to deliver the investment desired," he continued.

"We do not think it will be necessary or desirable to eliminate smaller arrangements (£5bn plus), who are large enough to do private market investments in some form, deliver good value for members and will only make up a small proportion of the total UK DC asset pool in any event."

Exceptions to the rule?

TPT Retirement Solutions also raised particular concerns around the impact of the proposed reforms on hybrid DB/DC master trusts, pointing out that, for many employers, any move to force consolidation of DC assets away from a hybrid scheme could trigger S75 debt liabilities and, in extreme circumstances, schemes falling into the PPF if the employer became insolvent due to the debt.

According to TPT, for members with hybrid benefits, any forced move of DC benefits outside the hybrid trust would negatively impact their ability to use their DC benefits to fund their pension commencement lump sum.

Given these concerns, a number of industry organisations have highlighted the need for exemptions to the government's plans.

The PLSA, for instance, said that exemptions will be needed for those already allocating to productive finance, hybrid schemes which might have pooled scale across DB and DC, and defaults catering for very specific investment beliefs.

The SPP agreed, stating: "If the government decides to proceed with a minimum AUM requirement then it should consider a broad exemption for smaller funds that outperform their larger peers; an exempt growth period during which time any new arrangements can focus on building scale; and exemptions for schemes that serve niche markets such as Sharia compliant default arrangements and CDC schemes.”

Calls to prioritise 'in-train' policies

But with existing initiatives, such as value for money (VfM), small pots and DC decumulation also expected to have the effect of driving consolidation, the PLSA warned that implementing overlapping proposals could be "wasteful" and compromise the overall efficiency gains intended by the government.

PLSA director of policy and advocacy, Zoe Alexander, therefore urged the government to "carefully consider the sequencing of reforms already in train and focus on increasing the supply of investable UK assets to achieve its aims effectively".

Association of British Insurers (ABI) director of policy, long-term savings, Yvonne Braun, agreed that the government "must prioritise", warning that the industry cannot safely implement so many "market-shifting policies", whilst also delivering pensions dashboards and a new support model for customers

"We support the government’s drive for scale in pension provision and better saver outcomes," she continued.

"However, in-train policies such as the VfM framework and the consolidator model for small pension pots share many of the same aims as the proposed size threshold for megafunds - and legislation to bring about transfers without individual consent is necessary to deliver them all.

"We believe the VfM framework and bulk transfers without individual consent will have the greatest impact to deliver scale and customer benefit, and we would like to see government focus its efforts on delivering these first."

Indeed, TPT Retirement Solutions said that, with the value-for-money framework now clearly defined, this should become the main criterion for scheme consolidation.

TPT Retirement Solutions chief executive, David Lane, said: "The government is at risk of not achieving its desired objectives with these proposals.

"In their current form, the changes would stifle innovation and limit competition. Simply introducing a requirement for larger default funds will not increase investment in UK productive assets. Worse, in the suggested timeframe, the changes would increase costs to employers, holding back growth at a difficult time for the economy."

Scope for broader change?

Instead of the focus on scale, Broadstone urged the government to focus on creating products that are compelling for investment via tax breaks, first loss protection or other downside protection, clear societal value and low cost to avoid the erosion of value.

The PLSA also encouraged the government to look to deliver broader changes to drive UK growth, such as planning reform, which will be “key” to creating a strong pipeline of opportunities.

Benchmarking could also have a role to play, as the SPP suggested that, in order to achieve the objective of better saver returns, the government could consider introducing industry league tables, constructed using a concise set of metrics that holistically assess member outcomes, and calculated by an independent trusted source.

"This would incentivise providers to aim for the size of assets under management that would be most conducive to allocating investments with the most attractive net of fee risk-adjusted returns,” Singleton explained.

Benchmarking could help in the push towards productive investments too, as the PLSA argued that, rather than scale tests, it would favour greater focus on defining ‘what good looks like’ for the government in relation to investment in UK productive assets.

Broader calls for change have also been made, as Hargreaves Lansdown head of retirement analysis, Helen Morrissey, said that the idea of a lifetime pot could be a "gamechanger" for member engagement.

"We think member outcomes could be enhanced further by development of the lifetime pot idea whereby members are able to choose which provider receives their pension contribution throughout their career," she stated.

In addition to this, the Association of Consulting Actuaries (ACA) encouraged the government to once again look to the defined benefit (DB) side of UK pension provision in furthering its objectives for growth, by bringing forward legislation to better enable the transfer of DB surplus into DC arrangements.

"This could not only fund DC benefits for current and future workers and provide some much-needed positive incentives to UK employers but also provide greater near term support for increasing the scale of some specific DC funds," ACA chair, Stewart Hastie, stated.

"We continue to be disappointed that legislative changes in this area seem to have been put on the back-burner when they could offer an extremely valuable and quicker boost to both investment and member outcomes.”

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