Pensions Consolidation: Putting the Buy-Side in Control of the Future

Consolidation has been a major theme in the pensions sector in the UK for several years thanks to a combination of factors ranging from increasing regulatory pressures and market-driven developments, to de-risking with insurance companies and the emergence of commercial consolidators.

But, while consolidation is happening, the UK is considered to be “behind the trend” compared to markets such as the Netherlands – which is already managing €1.5 trillion in pension assets in c. 200 schemes.¹

The UK pensions market currently has around 27,000 Defined Contribution (DC) schemes², some 5,000 Defined Benefit (DB) plans³ and 86 Local Government Pension Scheme (LGPS) administering authorities in England and Wales⁴. Now, if the UK Chancellor Rachel Reeves gets her way, this relatively sedate consolidation is going to significantly speed up with broader consequences beyond pensions alone.

But what will be the outcomes of such industry-wide consolidation. To consider this, it’s worth looking at how far the industry has come and where it is heading.

Today, the DB market has c. £1.4 trillion of assets³ in some 5,000 individual plans – already reduced from c.7,800 plans⁵ in 2007 when the PPF 7800 index was first introduced. The number of DB plans is expected to fall faster as more plans have been reaching their endgame (in part thanks to the vastly improved funding levels as a result of the 2022 UK gilts crisis and the relatively strong investment performance over time, and the increasing capacity of the insurance market for Pension Risk Transfer (PRT) making deals more affordable).

Over the last year, there have been at least two new entrants to the PRT market and there are at least another two entrants waiting in the wings, one of them with significant capacity and ambition. In the ‘Pensions Investment Review: Unlocking the UK pensions market for growth’ consultation, the Chancellor has noted the relative maturity of the DB sector and broadly left it out of her thinking. However the new PRT entrants, a rumoured new commercial consolidator and the continuing higher funding levels currently enjoyed by DB plans will undoubtedly speed up transfers. The market could ultimately see as few as 50 successful providers holding the majority of DB assets.

The DC market consolidation on the other hand has been running at an increased pace thanks to regulatory encouragement. In particular, the number of occupational trust based schemes with over 12 members has declined 67% since 2012². The recent ‘Value for Money’ consultation from the Financial Conduct Authority (FCA) and the new combined code from The Pensions Regulator (TPR) will only add to the pressure on trustee boards and their governance structures making the Master Trust route only ever more attractive. In addition, the increasing focus on ‘at retirement’ proposition by schemes will further add to the Master Trust appeal. The number of Master Trusts authorised by TPR is currently standing at 33⁶, down from c. 90 at the start of the regulatory regime⁷. With the Chancellor setting a minimum £25 billion threshold for DC scheme size⁸, consolidation could potentially speed up further leaving only a small number of Master Trusts and a few remaining large single employer trusts in the market, potentially leaving a market of no more than 50 in the future.

Lastly, the LGPS is in the final stage of its first consolidation from 86 LGPS to eight LGPS pools with c. 28% of assets still yet to move to the pools⁹. The potential to move to fewer pools depends on the outcome of conversations with the Chancellor, the HM Treasury and the Ministry of Housing, Communities and Local Government. The aim set out in the recent ‘Local Government Pension Scheme (England and Wales): Fit for the future’ consultation is however clear; LGPS pools need to be FCA-authorised investment managers, have the expertise to implement investment strategies and be able to oversee and manage local investments. On top of this, the administering authorities will be required to complete the first consolidation by moving 100% of their assets to the pools. It is anticipated that the LGPS sector would end up with eight or less pools.

This Consolidation will have a profound impact on the industry, from asset managers to consultants and member record keepers as well as asset servicing providers. Market participants will need be supportive of consolidation activity and become comfortable with a numerically smaller market with far greater purchasing power. And, the impacts will not stop here. As these larger pools emerge as ‘price givers not price takers’, they will increasingly insource activities, further changing the market and its dynamics, firmly putting the buy-side in full control in the future.

The author is Mark Austin, Pensions and Insurance Executive, EMEA, Asset Servicing, Northern Trust

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