The government has been urged to introduce a new ‘comply or explain’ regime for defined contribution (DC) pension investments, after LCP raised concerns that the drive to DC 'megafunds' was the "wrong place to focus" to help generate more economic growth.

In its response to the government's consultation, Unlocking the UK pensions market for growth, LCP warned that consolidating DC schemes will take a long time, cause "massive cost and disruption" and may still fail to deliver the government’s stated objectives of investing more in the UK.

Indeed, whilst the government is talking about not implementing these changes until 2030 at the earliest, LCP suggested that more realistic timetable would run several years beyond this.

It also pointed out that the changes would also require "costly upheaval", emphasising the need to ensure that the costs of any structural change, which will ultimately be borne by members, improves their outcomes. 

In addition to this, the firm warned that a small number of ‘too big to fail’ providers and a market that has too many barriers to entry could stifle innovation, arguing that the changes would make scale the key focus for the industry in the short term, rather than investing in productive assets .

LCP also told the government that there is a risk that the proposals could undermine high quality but smaller than £25bn commercial master trusts that are already investing in line with the government’s priorities.

Given these concerns, LCP said that, instead of using scale as a proxy for UK productive finance, the government should be explicit about what it means by productive finance types of investments that it wants to see and where investment is needed.

It also encouraged the government to introduce a new ‘comply or explain’ regime for DC scheme investments, which goes beyond existing disclosure requirements. 

This, according to LCP, would allow trustees and providers to retain their freedom to invest in the best interests of members, whilst also requiring them to explain to the regulator if they concluded that this was not compatible with a specified minimum allocation to, for example, UK infrastructure. 

LCP head of DC, Laura Myers, said: “All of this legislative, regulatory and policy focus on driving towards mega funds for UK master trusts diverts attention from other measures which could deliver a greater level of productive finance on a much swifter timetable.

"Ministers now need to be clearer about what it is they want to achieve and to focus legislation on that rather than solely on scale as a proxy. It is also vital that the interests of members are put at front and centre of any reform agenda and not regarding as an afterthought.”

---