Labour’s looming overhaul to the pension system with smaller schemes being combined into “megafunds” could result in significant “risks” to the UK market, according to new analysis.
The Pensions and Lifetime Savings Association (PLSA) has raised significant concerns about the Government’s proposed Mansion House pension reforms, warning they may not achieve their intended objectives.
While supporting the Government’s aims to foster economic growth and drive consolidation, the PLSA cautioned that the defined contribution (DC) scale test, as currently designed, will not deliver on the core objective of increasing investment in UK productive assets.
The industry body highlighted that aspects of the proposals could be impractical to implement and risk negative outcomes for savers. Despite acknowledging further consolidation of pension assets could bring benefits for UK savers, the PLSA emphasised the need for careful consideration of potential unintended consequences.
This response from the association came as part of their submissions to separate consultations on proposals affecting DC schemes and the Local Government Pension Scheme (LGPS).
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Among the key concerns raised by the PLSA is that the proposals alone will not lead to increased UK investment, emphasising the need for an adequate supply of investable assets and broader changes such as planning reform.
The association highlighted several drawbacks with the minimum size requirements for DC funds, particularly regarding the proposed level and implementation timeframe. There are worries about potential market disruption and the possible loss of well-performing schemes that already allocate to productive assets.
Specifically, the PLSA warned that the speed and scale of proposed consolidation could create capacity issues for both industry and regulators. Of particular concern is that increased competition for assets ahead of minimum size requirement deadlines could trigger a race to the bottom on pricing.
This could result in schemes concentrating on the lowest-cost investment strategies and discourage investment in infrastructure and private equity. The PLSA noted that existing initiatives, including value for money, small pots and DC decumulation, are already driving consolidation in the sector.
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The association warned that implementing overlapping proposals could compromise efficiency gains and prove wasteful. Rather than scale tests, the PLSA advocates for a greater focus on defining what constitutes good practice in relation to UK productive asset investment.
In its response to the proposals, the association suggests that if scale targets are imposed as proposed, certain schemes should be exempt, including those already allocating to productive finance and hybrid schemes.
The PLSA also emphasised that any reforms should avoid stifling innovation or damaging the beneficial role employers play in UK pension provision. These recommendations align with the association’s broader stance that careful consideration must be given to reform implementation to protect member interests.
Zoe Alexander, the director of Policy and Advocacy at the PLSA, cited the organisation’s support for the Government’s broader objectives while highlighting key concerns.
“The PLSA strongly supports the Government’s goals of fostering economic growth, driving consolidation and improving outcomes for savers. However, the DC scale test risks unintended market disruption and will not, on its own, deliver investment in UK growth,” she said.
Alexander urged a more measured approach to implementation, stating: “Instead, we urge 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.”
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Regarding the Local Government Pension Scheme, she stressed certain proposals need further examination.
“Funds must remain accountable to members, employers, and taxpayers for performance. A pragmatic approach will also be essential to ensure compliance within the proposed timeframe,” she added.
A key priority for the PLSA is maintaining accountability, with funds needing to remain answerable to their stakeholders, including members, employers, and taxpayers.
The organisation highlighted the importance of adopting a pragmatic implementation strategy that allows funds to comply with new requirements within proposed timeframes.
The association maintains that while reform objectives are laudable, successful implementation will require a balanced approach that protects stakeholder interests while advancing the Government’s goals for pension reform.
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