Scale expectations must be grounded in reality, industry says

In its response to the Department for Work and Pensions' (DWP) consultation, TPT Retirement Solutions called for the framework to recognise assets that already operate under the same investment and decision-making arrangements. Ruari Grant, head of policy at TPT, explained that the proposed rules needed to 'recognise where scale already exists in practice'. 'Where assets are invested under the same strategy, governance and decision-making framework, their legal or sectional structure should not prevent them from counting towards any scale measurement,' he said. TPT has an asset management subsidiary that manages money for its DC and defined benefit (DB) funds, and it also plans to launch a collective DC and a DB superfund in the coming years. Kate Smith, head of pensions at Aegon, agreed that 'all pension products investing in the common investment strategy' should be included in the definition of a 'main scheme default arrangement'. This is the term used in the regulations to refer to a provider's main default fund subject to the £25bn minimum size. Michael Jones, partner at law firm Sackers, pointed out that the current scale tests were focused on accumulation assets, meaning that money held in decumulation structures – such as guided retirement offerings – and collective DC would not count towards the £25bn total. 'To encourage innovation and support the nascent CDC market, we consider these assets should count towards the scale tests so long as they form part of a common investment strategy in the same scheme,' Jones said. Flexibility must remain under scale test Emma Furlonger, managing director of workplace and retail intermediary at Standard Life, said: 'While consolidation has an important role to play in creating a more efficient pensions market, it's essential that the introduction of a main scale default arrangement framework focuses on the outcomes being delivered for members rather than prescribing a single investment approach. 'The regulations should recognise that scale can already be achieved through shared investment capabilities, governance frameworks and underlying investment building blocks rather than identical fund structures or asset allocations. This will help avoid unnecessary fund mergers or member movements that do not improve outcomes.' 'As investment strategies evolve, providers must retain enough flexibility to meet common investment objectives through different structures and products where this is in savers' best interests. 'The regulations should recognise that scale can already be achieved through shared investment capabilities, governance frameworks and underlying investment building blocks rather than identical fund structures or asset allocations. This will help avoid unnecessary fund mergers or member movements that do not improve outcomes.' Other responses highlighted that the implementation of the scale test needed to be aligned with related legislation such as the contractual override power that will allow schemes to merge under the Value for Money framework. This merger power would be crucial to providers' ability to meet the £25bn minimum size, according to Aegon's Smith. 'Focus on member outcomes', government told Elsewhere in its response, TPT said aggregation should reflect where strategic investment decisions are made. It warned that common ownership alone should not allow separate schemes to aggregate where independent trustee boards set different strategies. The provider added that genuinely distinct investment propositions should continue to be recognised separately, including arrangements designed around ethical or belief-based preferences. 'Many bespoke arrangements are designed around the particular needs of employers and their workforces while already benefiting from scale through the same underlying investment funds.' TPT's Grant said: 'The rules need to distinguish between artificial fragmentation and genuinely different investment propositions, while giving trustees sufficient flexibility to design strategies that effectively meet members' needs.' The Investing and Saving Alliance (TISA) also warned against a scale regime that could force consolidation without improving member outcomes, particularly where different default arrangements already invest through the same underlying funds. Renny Biggins, head of policy for products and long-term savings at TISA, said: 'Greater scale can deliver real benefits for pension savers but bigger does not automatically mean better. Many bespoke arrangements are designed around the particular needs of employers and their workforces while already benefiting from scale through the same underlying investment funds.' TISA said forcing those arrangements into a single default could remove useful tailoring without creating additional member benefits and could encourage some employers to move towards single-employer trusts. Wording risks disruption, Aegon says The association also warned that the scale policy needs to work alongside wider DC reforms. Proposed value-for-money chain-linking rules, it said, could discourage providers from consolidating weaker defaults if doing so negatively affected the performance assessment of the receiving arrangement. TISA called for any wider fragmentation review to be delayed until the scale and Value for Money reforms have been implemented, so any remaining problems can be assessed on the evidence. Aegon's Smith also pointed out that, under the current wording, 'from April 2030, the expectation is that all auto-enrolment contributions… must be paid into an approved main scheme default arrangement'. She explained: 'This is likely to be disruptive to employers and their members and could mean employers would have to move their scheme to a different provider or strategy on the basis of this one metric alone, even though the arrangement may meet VfM criteria. 'Consideration of an acceptable 'buffer zone' under the £25bn target would prevent a cliff-edge scenario for employers, providers and members.'