Consolidating pension schemes into megafunds will not guarantee higher investment returns, the Pensions Policy Institute (PPI) has warned.

Its report, Assessing megafund pension reforms: insights from international experience, sponsored by SEI Master Trust and Now:Pensions, highlighted that economies of scale typically stemmed from cost savings rather than greater returns.

The Pension Schemes Act requires multi-employer defined contribution (DC) schemes to consolidate into megafunds with a minimum of £25bn of assets in their primary default arrangement by 2030, with limited exceptions.

The report analysed international pension systems and found that differences in factors such as market conditions, corporate structures, and population demographics meant it was not “clear-cut” that megafund reforms would provide better returns.

It said there was no guaranteed correlation between pension scheme size and level of investment return, noting that Australian DC Supers’ growth strategies had led to lower returns than their UK counterparts in the five years to 2024.

Furthermore, while administration and investment fees were falling in Australia, they remained higher than the UK charge cap on average.

The PPI added that although the megafund reforms aimed to increase investment in domestic private markets, other countries’ experience suggested that the reforms may not be sufficient to achieve this on their own.

Some DC providers in the UK were already accessing the benefits of scale, but others were not instituting structures enabling effective defaults and common investment strategies.

Understanding how new regulations can add to the efficiencies already achieved will be important to meeting policy aims, the report added.

“There is no guarantee that UK megafund reforms will achieve the better returns for savers targeted by government,” commented PPI research associate and lead report author, Melissa Echalier.

“The PPI’s new international analysis of similar measures, alongside data from stakeholder interviews, paints a more complex picture for return levels and other implications of the reforms.

“While learning from other countries can be insightful, differences between pension systems make it challenging to draw clear conclusions. In the UK’s fragmented system, the introduction of megafunds will likely play out differently to countries such as Australia and Canada."

SEI DC and solutions managing director, Steve Charlton, said that size was too often treated as a proxy for quality, and the relationship between scale, performance, and outcomes was more complex than that.

“Scale can provide useful capabilities, but it is not an outcome in its own right,” he continued.

“What ultimately matters is whether pension schemes deliver good value and more savings for members to spend in their retirement, and this research helps bring that focus back to the fore.”

Now:Pensions director of PA and policy, Lizzy Holliday, added: “As the report shows there are lessons that can be learnt from international comparisons, but each country has differing systems, demographics and markets.

“The report highlights that scale, private market investment capabilities and cost efficiencies can be achieved in a number of ways.

“There are also a broader set of factors that influence domestic and private market investment that must be considered.

“It will be important to take these into account at the next stage of policy and regulatory development to support delivery of good member outcomes.”

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