Will consolidation rescue the UK’s pension future?

Since taking office last year, the government has made clear that boosting economic growth and stabilising public finances are top priorities. Among the multiple levers being pulled is pension fund consolidation, and the creation of “mega-funds” has emerged as a way to deliver meaningful improvements for savers and increase investment into UK infrastructure. If successful, it could reduce fees, unlock new asset classes, and improve retirement outcomes for millions.

To support this, the Pension Schemes Bill, introduced to Parliament in June, calls for the merging of small pots. In the words of the Department for Work and Pensions, the Bill aims to “tackle schemes delivering poor returns for savers, combine smaller pension pots, and create bigger and better pension funds. These measures will drive costs down and returns up on workers’ retirement savings – putting more money in people’s pockets”.

Specifically, the government aims to automatically merge defined contribution pots valued under £1,000 that have been inactive for at least 12 months, of which there are currently around 13 million in the UK. With the ensuing creation of around 20 mega-funds holding at least £25bn AUM in their main default arrangement, there is an assumption from the government that the trustees of these larger schemes will drive down costs and invest in a wider range of assets, including reserving powers to direct investment into UK assets as part of the growth agenda. The Bill also aims to create new economies of scale that will unlock access to diversified asset classes, including infrastructure, private equity, and UK growth investments.

As a result of this policy, the number of schemes in the UK is expected to fall below 1,000 by 2035.

Where consolidation could falter

While few would dispute the ambition behind these reforms, achieving them in practice will require more than good intentions. Success will depend heavily on getting the technology right. Pension providers must be empowered to scale efficiently before emergent mega-funds can deliver better outcomes for individuals investing in their future financial security through their pension.

This sector-wide effort will face significant operational challenges.

One of the biggest hurdles is legacy system sprawl and the complexity of integration. Many DC providers are still running a patchwork of legacy systems that resist standardisation. Without modular platforms and repeatable migration tools, merging pots at scale is likely to be slow, error-prone, and expensive, increasing the risk of poor member experiences and reputational damage.

Change management and communication gaps also create difficulties. Trustees, employers and scheme members will need demystified information and guidance as schemes consolidate, with portals, analytics and communications platforms installed to help strengthen trust as schemes scale up.

Migrating millions of pots introduces serious risks around data security, privacy, and consistency, making high-quality data governance critical. Providers must manage this with rock-solid controls and clear audit trails.

Customisation versus standardisation will be another key tension. Mega-funds must scale without becoming generic. Technology will be essential to help larger schemes balance regulatory compliance with the need for scheme-specific flexibility.

The role of technology in the consolidation process

Technology will be vital in taking the pressure off scheme providers as this consolidation exercise gathers speed. For instance, large-scale value-for-money assessments will require real-time data and benchmarking to track progress. At the same time, modern administration platforms will be needed to make it easier to merge small pots and onboard new schemes via APIs.

Governance activities, including workflows for trustee reporting, audit logs and scheme-level segmentation, will have to be automated to enable providers to scale up in full compliance with regulations and obligations to members. In addition, providers will rely on flexible SaaS and cloud-based technology stacks to create new schemes rapidly and efficiently and to tailor governance while retaining centralised control.

Appropriate technology will also play a key role in improving both cost efficiency and transparency for members. It will help eliminate differential pricing and reduce costs per member to make pensions more beneficial for savers, which is a key reason for consolidation.

Ultimately, the government’s growth plans rest on the assumption that scale will solve the sector’s problems. But scale without the right technology is an illusion. Without serious investment in the platforms and processes underpinning pension administration, consolidation won’t deliver value. It will just create larger, more expensive versions of today’s inefficiencies.

The race is on. Achieving this will require effective use of technology to address the sizeable challenges involved.

Posted in: Wealth Management Administration