The consolidation framework laid out in the Pension Schemes Bill could risk reinforcing the status quo, New Capital Consensus director, Ashok Gupta, has warned, arguing that scale alone will not redirect pension capital into the UK economy.

The bill, which is currently progressing through the House of Lords (HoL) committee stage, sets out a framework to encourage consolidation across the pensions market, alongside measures to improve value for money and support productive finance.

Ministers suggested that larger pension funds would be better placed to invest in the UK economy, including infrastructure, private markets and regional projects, helping to address long-standing geographic imbalances in investment.

However, Gupta argued that consolidation on its own would not deliver these objectives unless it was accompanied by changes to regulation, incentives and governance.

“We think the Pension Schemes Bill is absolutely going in the right direction,” said Gupta, who previously chaired the Pensions UK Defined Benefit (DB) Taskforce that helped design the original superfund framework.

“There’s a lot we really like about it - consolidation, value for money, the focus on UK investment - but it’s only about 50 per cent of what needs to be done.”

“If you don’t incentivise funds to invest differently,” Gupta added, “you just end up with larger pools of capital doing exactly the same thing they were doing before.”

With this in mind, New Capital Consensus recently set out a package of potential amendments, shared with several peers in the HoL, aimed at addressing what it saw as structural barriers to productive UK investment.

One proposal would allow UK insurers to establish pension superfunds as legally separate, ringfenced entities, operating outside of Solvency UK capital requirements where appropriate safeguards were in place.

Gupta argued that this could increase competition in the emerging superfund market and make better use of existing expertise within the insurance sector.

Another recommendation would give trustees greater discretion to pursue a superfund transaction when they believe it is in members’ best interests, even if the scheme is funded at or close to an insurance buyout.

Gupta warned the current framework risked encouraging “premature derisking” into insurance solutions at the expense of long-term investment potential.

Looking at the bigger picture, Gupta said a key issue was the assumption that ever-greater scale automatically improves investment outcomes.

While consolidation can reduce costs and improve governance, Gupta noted that there was a point beyond which additional scale yields diminishing returns, particularly for domestic and regional investment.

“If an investment opportunity in the UK needs £50m, that simply doesn’t move the dial for global asset managers,” Gupta explained.

“Unless it’s a billion pounds, they’re not interested.”

In contrast, he argued that mid-sized pension superfunds - in the region of £20bn to £50bn - could strike a better balance, being large enough to hire high-quality investment professionals while still being able to deploy meaningful capital into UK projects.

“At £20bn or £30bn, a £50m investment into a regional project actually matters,” Gupta added.

The think-tank has also raised concerns about the way superfunds’ technical provisions could be calculated under the bill.

One suggested amendment would allow liabilities to be assessed using a cashflow-based approach rather than a purely discounted balance-sheet measure, which Gupta argued could reduce herding behaviour and allow funds to invest more confidently in long-term, productive assets.

Another would require trustees to report more explicitly on the duration of their liabilities and to justify their choice of investment strategy and benchmarks, including how these were expected to deliver the best possible returns for members.

Gupta said this could help counter what he described as an “index mindset” that favours low-cost global strategies over domestic investment.

“If you track a global index, you’re giving roughly 25 per cent of your money to the Magnificent Seven and under 4 per cent to the UK,” he cautioned.

“That’s a very big active decision dressed up as passive investing.”

While global technology stocks had delivered strong returns in recent years, Gupta questioned how sustainable those valuations are and how much of the performance reflected fundamentals rather than the sheer volume of capital being funnelled into the same companies.

“When you’re 25 per cent in a handful of US tech stocks and under 4 per cent in the UK, that feels like quite a high-risk decision,” he said.

The government has already attempted to address some of these issues through initiatives such as the Mansion House Compact, which seeks to encourage DC schemes to increase allocations to unlisted equities.

However, Gupta argued that mandates and quasi-mandates risked being counterproductive.

“We don’t support mandation. We support incentivisation,” he emphasised. “You want funds to want to invest in the UK, not to be forced into it.”

He also revisited why the first wave of DB superfunds failed to gain momentum after their introduction in 2018 and 2019, arguing that regulatory decisions played a significant role.

“The reason superfunds struggled last time is that they were effectively regulated like insurance companies,” Gupta claimed.

“That removed almost all the difference between buying out to an insurer and moving into a superfund.”

Despite his concerns, Gupta stressed that even if the bill passes without further amendments, it would not be a failure, but rather “less effective.”

Without changes to incentives and regulation, he warned, consolidation risked reinforcing existing investment behaviours rather than delivering the regional investment and economic resilience policymakers are seeking.

“You can pool assets overnight,” he concluded, “but changing how that capital behaves takes more than scale alone.”

---