Are we just a few simple steps away from creating at least 4, ￡100bn+ Mega-Funds by 2030?

Leaving aside the LGPS, the Government's Pensions Review is also considering the question of scale across defaults funds in private sector DC. Many significant and complex questions are being considered, but are we overcomplicating something that should really just be much simpler?

There are benefits to operating at scale. Administrative overheads become a small % when spread across large asset pools. The stewards of large asset pools can secure better deals for customers and scheme members on price from asset managers and the private equity sector. The costs of stewardship itself can be spread, and greater diversification and exposure to illiquid assets can be achieved without compromising sensible levels of liquidity.

For me, the first step would be to tackle the fragmentation within the large Contract Based workplace asset pool. The 'contract over-ride' proposals being explored by Government would make it easier to consolidate customers and assets from older products into modern products with the big default funds. Assets which started out in employer designed bespoke funds could also be consolidated, as we increasingly see employers switch flows of new contributions to those new default funds.

The largest asset pool sits in retail pensions, where many, including the Self-Employed save for retirement. Traditionally, Independent Financial Advisers (IFAs) have designed and managed bespoke investment portfolios for their clients, but many are now concerned about the costs and risks of providing investment services and there is a trend amongst some IFAs to just use the governed, good value, default funds designed for Auto Enrolment, as the investment solution for their clients. IFAs working with Scottish Widows have already invested ￡10bn in this way.

There are some technical niggles to work through in terms of how LTAFs which will feature in workplace defaults, can also feature in this same way on the retail side, but this opens up the huge retail pensions market to the Mega Funds concept.

An equivalent of Auto Enrolment is required for the self-employed workers. A solution may still be some way off, but our thinking on Mega-Funds today, should be future proofed with that in mind.

Although Contract Based and Trust Based multi-employer schemes can be quite different in some ways, asset management need not be one of them. For those firms operating both Trust and Contract Based propositions, its possible to deploy the same Mega-Fund across an Approved Personal Pension Scheme (APPS) and a Master Trust (MT). At Scottish Widows both Trust and Contract Based clients benefit from participation in a Mega-Fund currently sitting at ￡70bn.

The direction of travel in recent years has been for Single Employer Trusts (SETs) to consolidate into Master Trusts. That seems set to continue for many reasons, not necessarily directly related to asset consolidation. Whilst the majority of SETs now operate on a bundled basis, many still outsource the administration and investment mandates separately. There is no reason why the investments can't be mandated into Mega-Funds. At Scottish Widows we are the stewards of ￡10bn of assets invested by those types of schemes in that way.

Creating Mega-Funds could be as simple as removing the fragmentation in the large Contract-Based asset pool, whilst thinking about Mega-Funds as asset pools which could be deployed consistently across all 4 of the UK's DC pension sectors, to meet customer and client demand.