When scale becomes the answer to everything
The UK pensions market is moving in one clear direction: fewer, larger defined contribution schemes. In many parts of the industry, scale is no longer seen as one part of the answer. It is increasingly presented as the answer. Lower costs, better governance, greater investment capability, easier regulation. Bigger, we’re told, means better.
And, true, sometimes it does. As I’ve written before, scale in workplace pensions is important, especially for mass market pension provision. But the arbitrary nature of the Government’s scale proposals raises some serious questions about its motivators… is this really about better member outcomes or is it just about scale supporting the Government’s productive finance agenda?
The Pension Schemes Bill is going through the House of Lords and it was great to see peers pick up on this point. The Lords amendment to the Bill allows well-performing smaller schemes to potentially sidestep scale tests. And this raises a more important question. What if size is not the point? Or, maybe, what if the industry is starting to mistake size for quality?
We’ve seen this logic before…
Take the UK water industry. It was built on a similar promise. Consolidation would drive efficiency. Scale would improve outcomes. Larger providers would be easier to regulate. On paper, the case was compelling. In practice, it did create bigger, more consolidated players with greater operational heft.
But it also helped create a market dominated by a small number of very large providers, where scrutiny has intensified and questions have grown louder about whether end users have benefited as much as they were supposed to (hint: they haven’t).
The lesson isn’t that scale failed. It’s that scale solved some problems while creating others (a supposed “market” based on no actual competition, weak regulation, lack of incentives to invest in water infrastructure… I could go on…).
Pensions aren’t water, but the direction is familiar
Pensions are not water, of course. The comparison should not be pushed too far. There’s competition in pensions, at least at the point of employer and adviser choice and, increasingly, retail providers are providing interesting challenge. Assets are ringfenced. Governance structures are typically stronger. The regulatory environment is different and the underlying purpose is different too.
But the direction of travel is strikingly similar. We’re deliberately concentrating the market, and doing so in the belief that larger schemes will naturally produce better outcomes.
Scale can help. It can’t prove quality
Scale can absolutely bring benefits. It can lower costs, improve access to private markets (Ed: is that a good thing?), strengthen in-house capability and give schemes more resource to invest in governance, communications and member support. None of that should be dismissed. The case for scale is real and is one I’ve been a proponent of.
What’s less convincing is the increasingly embedded and unchallenged assumption that scale automatically delivers the outcomes that matter most.
It doesn’t automatically lead to better net returns. It doesn’t guarantee better retirement outcomes. It doesn’t ensure stronger member engagement or better decision-making at retirement. Those things still depend on execution, accountability, commercial discipline and a genuine focus on what members need.
Why the amendment matters
That’s why the Lords’ amendment matters. Allowing smaller schemes to continue, if they can prove strong outcomes and value for money, isn’t about resisting consolidation for the sake of it. It’s about resisting a system where scale becomes a poor proxy for quality, rather than one possible contributor to it. Once an industry starts using size as a shortcut for success, it becomes much easier to stop asking harder questions about performance.
The real risk is complacency
When a market starts drifting towards oligopoly, the danger isn’t simply that it becomes concentrated. The danger is that competitive pressure weakens. There’s less ambition and less motivation to keep improving because the market itself does less of that work for them.
In pensions, that should concern us. This is a market that exists to deliver long-term outcomes for members. It shouldn’t be enough for schemes to be bigger, better resourced or easier to supervise if the end result is not demonstrably better outcomes for the people saving into them.
Better is the test
That’s the real lesson from water. Not that scale is bad. Not that consolidation should stop. But that scale, on its own, is never proof of better outcomes. It can help. It can enable. It can create the conditions for success. But it is not success in itself.
In pensions, the test should remain stubbornly simple: are members actually better off?
Darren Philp, Co-Founder
