Scale vs. Scrutiny: Finding the balance in workplace pensions
We’re in the midst of pensions industry conference season and you don’t have to go far to hear a speech/discussion on the need for and benefits of scale in workplace pensions. So much so, that, in today’s pensions world, you’d be forgiven for thinking that scale is the magic bullet that fixes all. Lower costs… better investments… fewer headaches for the Regulators…
But let’s pause for a minute. While the logic is sound, and I, for one, have been banging on about the need for scale in workplace pensions since I joined the NAPF (previously PLSA, now Pensions UK) in 2010, the obsession with “bigger is better” deserves a degree of challenge. Because just like in life, when it comes to pensions, size isn’t the only thing that matters.
The case for scale… spoiler… it’s a strong one…
Let’s start with the case for scale. The benefits are well documented. Bigger schemes and providers can spread their costs across more members and more assets. That means cheaper administration, better systems, and potentially more bang for the member’s buck. It’s economics 101: fixed costs divided by more people equals lower costs per head. Tick.
And let’s not forget the investment side. Scale potentially (and in theory…) gives you access to the good stuff. Infrastructure, private equity, fancy illiquid assets that small schemes just can’t touch (although I’d caveat that we’re much better at talking about this than actually investing… but its early days). It gives providers and schemes negotiating clout with fund managers. It allows for better diversification and, that should, in theory, lead to better outcomes for savers.
Large providers tend to have more robust governance, stronger systems, and the resources to innovate. They can build proper digital engagement tools. They can use data smartly. They have the resource and backing so can withstand shocks. All very worthy reasons to celebrate the rise of the “mega-fund”.
Is there a but?
There’s always a but… and here’s where it gets interesting. Because scale, for all its virtues, has limits. At some point, the benefits start to flatten out — and the downsides creep in.
Let’s take bureaucracy. Big organisations move slowly. Decision-making gets bogged down. Innovation becomes a PowerPoint exercise. You can almost hear the collective groan every time someone suggests doing something new.
Then there’s the risk of “samey samey”. When you’re catering for millions of members, the service inevitably becomes one-size-fits-all. Personalisation and flexibility go by the wayside. The relationship between member and provider becomes distant and transactional. And that’s not good for engagement, which, let’s face it, is something that our industry is particularly good at (Ed: do I sense a touch of irony here?).
And what about competition? If we end up with just a handful of giant master trusts or super-providers, we risk creating an oligopoly where innovation stalls and complacency sets in. We’ve seen this before in other sectors: when players get too big and competition is stifled, consumers rarely win.
And last, but by no means least, there’s systemic risk. If one of these mega-schemes stumbles – a governance failure, a bad investment call, a tech meltdown – the consequences ripple across the whole system. The regulator’s “sleep at night” test suddenly looks a lot harder to pass.
The sweet spot
So, scale matters. It drives efficiency, gives access to better investments, and creates resilience. But it’s not a free lunch. Bigger isn’t automatically better.
The goal shouldn’t be scale for scale’s sake. It should be about finding the sweet spot. Big enough to capture the benefits, but small enough to stay nimble, member-focused and innovative. It’s about so much more than scale, and to my mind, strong independent governance needs to be given equivalent billing, since without that, members are exposed.
Because at the end of the day, it’s not about how big a scheme is. It’s about how well it works for the people it’s supposed to serve.
Darren Philp, Co-Founder and Director
