Peter Roos:Providers with the best technology as well as the strongest administration and governance will be best equipped to deliver better pensions and performance
The UK defined contribution (DC) market is entering a period of accelerated consolidation.
The Pension Schemes Bill will introduce a significant scale requirement with master trusts required to reach £25bn in AUM by 2030 or, at the very least, hold £10bn in assets with a credible plan to hit the £25bn milestone by 2035.
The aim of the policy push is simple – scale.
Fewer but larger providers, the government hopes, will unleash more pension capital into productive finance through investment in illiquid assets, improve long-term outcomes and enhance value for money for members.
The reforms will inevitably usher in a period of intense consolidation over the next decade as master trusts near or above the £25bn mark build scale by acquiring assets. Sub-scale providers are already beginning to find themselves squeezed out and must consider how best to navigate the ‘new normal' of the master trust market's dynamics.
These trends are already beginning to reshape behaviour in the market as group personal pension (GPP) plan transfers look to master trusts that have either already met, or credibly can meet, the £25bn mark by 2030.
However, while the destination may be clear, the journey is not likely to be straightforward.
Consolidation headaches
The largest master trusts will benefit from increased buyer power and a quickening flow of assets, yet this evolution will ask searching questions of their models.
Funnelling a surge of members into a smaller number of master trusts will require significant investment in technology, administration and operational processes to cope with the growth in assets. With legacy issues prevalent throughout the industry, reputational risk could be at its highest just when savers are expecting service improvements.
The expectation of rapid M&A also means that targets must be acquired carefully. Data quality, administration capabilities and the ability to scale will all be right at the top of any acquirer's due diligence to avoid being burdened with targets that threaten the operational efficiency of the master trust.
For master trusts that are unlikely to reach scale, addressing these issues before going out to market will be critical to a successful transfer that secures the future for their members and helps to achieve the best possible pricing. It is likely to drive short-term investment in back-end systems in the next couple of years before any acquisition.
Value for money risks
The reforms are predicated on their ability to improve value for money for DC savers and this measurement will be a key element by which they are judged a success or failure.
Investment performance is one side of this coin and while consolidation will not guarantee higher returns, greater scale should make it easier for schemes to broaden their investment strategies.
However, at a time when price will be a huge sensitivity for providers, master trusts will need to wrestle between competing on charges and responding to government pressure to invest in private assets which are typically more expensive, hard to secure and operationally complex.
Rapid consolidation may also reduce the diversity of investment views and allocations. Master trusts will not want to become an outlier on performance, which could inadvertently push savers towards homogenised returns.
The member experience will be another critical aspect that providers must urgently address.
As saver journeys become increasingly complex, the need for a single ‘master of data' and resilient back-end technology grows to meet evolving demands as new products come to market.
Invest now, for future success
The challenges that the market faces will all necessitate a period of investment in software, processes and administration to grasp the opportunities of scale offered by this regulatory mandated era of consolidation.
Providers with the best technology as well as the strongest administration and governance will be best equipped to deliver better pensions and performance, enable better retirement pathways and measure outcomes that genuinely matter to members.
As we have seen first-hand through Lumera's work in Sweden, scale improves outcomes only if these building blocks are developed and prioritised over a land grab on assets, supported by clean, reliable data and systems flexible enough to meet future regulatory and product demands.
Peter Roos is chief commercial officer at Lumera
