Article / 4 Jun 2025

Pensions investment review final report

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The Government confirms its plans to double the number of £25bn multi-employer defined contribution (DC) default megafunds by 2030 and to go ahead with proposed investment and governance changes for the Local Government Pension Scheme.

Encouraged by the Australian and Canadian pension systems, the UK Government’s Pensions Investment Review Final Report confirms its intention to press ahead with its consolidation and scale plans requiring the formation of £25bn multi-employer DC default ‘megafunds’. These plans, along with the pooling, governance, and administration initiatives for the Local Government Pension Scheme (LGPS), aim to “address fragmentation, boost investment, increase saver returns, and tackle waste”. Many of the changes will be included in the soon to be published Pension Schemes Bill with regulations where required.

The report was released alongside responses to two consultations that accompanied the Interim Review Report: (Unlocking the UK Pensions Market for Growth consultation response and LGPS: Fit for the future consultation response).

The Government wants to see a reversal in the decline in domestic DC pension investment which has reduced from 50% of DC assets in 2012 to a current 20%. It also points to the changes making potential savings of £1bn through economies of scale and improved investment returns, referencing an estimated £6,000 increase to an average earner’s pension benefits.

On the same day, the Government also published its much anticipated Options for Defined Benefit schemes response confirming that it will be including surplus extraction flexibility provisions in the Pension Schemes Bill – read our in-depth insight for further details.

Scale and consolidation reforms

Scale: minimum AUM £25bn by 2030 subject to transition pathway and exemptions

With certain exemptions, multi-employer DC providers and master trusts used for auto-enrolment will need to have at least one ‘main scale default arrangement’ with a minimum of £25bn in assets under management (AUM) by 2030 – this is the size at which the advantages of scale begin to be seen.

Other arrangements do not need to be consolidated and there will be no set number required.

For clarity and consistency, a default used for scale will have a set definition, defined as a ‘main scale default arrangement’ – the Government will consult on this definition. Those affected will be keen to see how such an arrangement will be defined.

The Government is also introducing a transition pathway concession so that schemes with at least £10bn in AUM by 2030 can continue if they have a ‘credible plan’ to reach £25bn AUM by 2035. They will need to show that they “have or are building, an investment capability commensurate with scale”.

Schemes that cannot satisfy the scale conditions by 2030/2035 or access the transition pathway will have to cease auto-enrolment provision.

Scale conditions will not apply to collective defined contribution (CDC) schemes, DC/ defined benefit hybrid schemes used by closed industry/ professional employer groups or defaults relating to a protected characteristic, for example, religion.

Innovation: ‘new entrant pathway’

A new entrant pathway is also going to be established for new market entrants with ‘significantly different’ innovative products. The idea is that this pathway can be used for multi-employer CDC schemes.

Consolidation: need regulatory approval to set up new defaults

New default arrangements will only be possible if they fulfil specific criteria such as addressing protected characteristics, ethical considerations, or aiding employers in managing conflicts, and receive regulatory approval. Nevertheless, there will be no limit on the number of default arrangements or funds allowed within a particular DC scheme. However, the industry is expected to address fragmentation.

Contractual override for contract-based schemes

To facilitate consolidation, the Government will allow contract-based schemes to transfer members without consent into a trust-based or contract-based arrangement. This override will be subject to consumer protections including that a transfer must be in savers’ best interests, guided by objective Value for Money (VFM) Framework metrics and validated by an independent expert. The override will be developed by the Financial Conduct Authority (FCA). Transfer costs will be covered by the provider(s). The FCA will be responsible for the measures, while TPR may produce guidance for receiving scheme trustees if appropriate.

Market review in 2029 of contractual override and VFM Framework

The Government believes that the override and VFM framework will address fragmentation and poor value. However, to verify this, there will be a government-led review during 2029. The presumption will be that underperforming defaults will consolidate into a default scale arrangement unless they can demonstrate that to do so would not benefit members. There will be a legislative underpin should fragmentation persist.

Cost versus value – the VFM Framework to be introduced in 2028

The Pension Schemes Bill will also include the new VFM Framework, the first assessment for which is planned for 2028. The VFM Framework aims to assess VFM through publicly available consistent disclosures based on various scheme quality metrics. Trustees and providers will have to address poor VFM including a possible transfer of members to an arrangement that does provide VFM.

Prior to the VFM coming in, TPR and the FCA will, from 2026, conduct a joint market-wide data collection exercise so that they can report on DC scheme asset allocation information – this will continue annually until the VFM disclosure information is available.

The interim review paper discussed whether an employer duty and adviser regulation should be introduced to require consideration of value in pension scheme selection. However, this is being put on the back burner for now.

Investment from DC schemes – reserve power to mandate investment

Part of these changes are being driven by the Government’s desire to see increased investment in both private markets including venture capital, infrastructure, property and private credit and the UK economy. Heartened by the recent voluntary Mansion House Accord and the commitment of 17 large DC pension providers to invest 10% of their main default funds in private markets with 5% of this in the UK, the Government has decided against mandating in this area. However, the Pension Schemes Bill will introduce a ‘reserve power’ for the Government to introduce quantitative baseline targets for pension scheme private asset investments, should it deem it necessary to do so.

Anticipating concern regarding mandatory investment, the Government has confirmed that it does not see the power being used unless the Mansion House initiative is unsuccessful and even then, only after careful consideration of the possible effect of targets on members and economic growth and with member safeguards including consistency with fiduciary duty principles.

The LGPS

The LGPS aspects of the review have focused on asset pooling, improved governance and investment. The Government will be going ahead with its main proposals which will see the £392bn LGPS assets consolidated from 86 Administering Authorities into 6 pools by March 2026. It wants the LSPG to “use its scale to support UK investment and regional growth”.

  • Minimum standards for asset pooling: Administering authorities (AAs) will have to delegate investment strategy implementation to the pool as well as obtain investment advice from the pool and transfer assets, so they are managed by the pool. The pools will be set up as FCA authorised and regulated investment management companies which will have to undertake due diligence on local and regional investments. 
  • Transition proposals: There will be a March 2026 LGPS asset pooling deadline. The Bill will also include a power to direct an administering authority to participate in a set pool should the move from eight pools to six not happen on a voluntary basis. 
  • Local and regional investment: The Government will take forward its plans to encourage local investment including a target range for investment, which the Government says will secure £27.5bn for ‘local priorities’. 
  • Governance review: To improve governance, AAs will be involved in a triennial independent governance review. AA pension committees will have to include an independent member who acts in an advisory rather than voting capacity. Other governance changes include a senior LGPS appointment and publication of an administration and governance/ training strategy.

Boosting the UK’s pipeline of investment opportunities

Chapter 5 of the report sets out the Government’s reform plans for addressing the ‘pipeline’ of investment opportunities in investment, infrastructure, corporates and growth sectors, and regional investment.

Comments

The changes represent a seismic change to the current DC market with, the Government says, the potential to unlock £80bn of investment to drive economic growth. Larger default funds could lead to increased investment in a broader range of assets, such as domestic infrastructure and private equity, offering improved returns and better value for savers through economies of scale. Although increased size does not necessarily equal improved outcomes, the Government cites evidence from the Australian and Canadian pension systems that supports this approach. While the Government aims to boost productive finance investments in the UK, effective implementation will be crucial.

Next steps

Phase two of the Pensions Review will commence soon, focusing on pension adequacy, including issues around under-saving and later life inequalities. A reform roadmap will also be published in due course setting out more detail of the Government’s wider plans including sequencing of the changes.

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