Moves to create pensions “mega funds” could lead to power being concentrated in the hands of a small number of people, a report has warned.
The “pensions powerbrokers” research from consultants LCP (Lane Clark & Peacock) estimated that more than half of the money in occupational defined contribution (DC) pensions – over £160 billion – is controlled by fewer than 50 trustees.
The report said: “We are witnessing an extraordinary consolidation of power into the hands of a remarkably small number of people.”
It warned that a drive towards huge funds, where schemes typically serve thousands of employers and millions of workers, risks a loss of employer and member voices in the running of schemes.
It said issues also raised include where sources of innovation might come from in a pension landscape “dominated by a handful of giant players”.
The report said there are 11 million extra workplace pension savers compared with 2012 when automatic enrolment started, overwhelmingly in DC schemes.
With DC schemes, savers bear the risk of the eventual size of their retirement pot, based on factors such as investment performance and contributions.
The report said: “Prior to the start of automatic enrolment, the dominant form of workplace occupational pension provision was the single employer Trust. These are schemes designed to provide pensions purely for the present and past employees of a single employer.”
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The number of occupational trust-based DC pension schemes tied to a single employer has been in decline, while multi-employer “master trusts” have grown “rapidly” in recent years, the report said.
Sir Steve Webb, a former Liberal Democrat pensions minister, who is now a partner at LCP, said: “The increasing concentration of power in the hands of a small number of trustees is extraordinary.
“Whilst these individuals will be carefully chosen and typically highly expert, the model of having a handful of people overseeing huge ‘mega funds’ raises serious questions which the Government has not so far addressed.
“In particular, much more needs to be done to make sure that there is proper accountability of trustees by employers and scheme members, and that there is scope for innovation and challenge in these enormous financial institutions.”
The report was based on analysis of data on scheme assets, alongside interviews with industry figures, including trustees and providers of Master Trusts.
LCP partner Nathalie Sims said: “There is no doubt that the way pension schemes are run will benefit from the current drive to greater professionalisation of trusteeship.
“In particular, overseeing multibillion-pound pension schemes requires a highly skilled group of people, with access to ongoing training and support.
“But it is also important that we have structures in place to make sure that there is plenty of independent challenge and advice for these ‘mega fund’ trustees, as well as diversity of thought amongst those who secure these crucial roles in the future of workplace pensions in Britain.”
Helen Dean, chair of the Standard Life Master Trust Board, said: “The concentration of decision-making power should not be perceived as a negative.
“On the contrary, such configurations are easier to observe and open to higher levels of scrutiny than the hundreds of single employer trusts currently operating.
“The decisions taken by the mega funds will be some of the most publicly scrutinised, underpinned by the strongest governance, extensive support structures, and undertaken by highly qualified individuals with deep experience built-up over many years.
“Though we’re at the start of this consolidation mega fund journey in the UK, we must stay focused on the opportunity to raise the bar to deliver better outcomes for members across the board, and this includes welcoming heightened levels of professional governance and oversight.”
A Department for Work and Pensions (DWP) spokesperson said: “As pension schemes grow, we want to ensure that savers continue to receive the best possible outcomes.
“Our consultation explored exactly the questions this report raises, examining how existing governance structures and regulatory frameworks need to evolve as the market consolidates.
“We are carefully considering all responses and will set out next steps in due course.”
