LGPS pool chair: Fragmented system cannot continue

Speaking to attendees at the Pensions and Lifetime Savings Association's investment conference in Edinburgh, Denise LeGal and representatives of other large asset owners argued that only a less fragmented sector will be able to access illiquid markets and undertake robust stewardship in a cost-effective way.

There are currently 5,422 funded defined benefit schemes operating in the UK, managing £1.7tn between them. In defined contribution a total of £71.3bn is managed by 29,570 schemes, although a large proportion of these are relevant small schemes, formerly known as small self-administered schemes.

"Further consolidation in the pools and the private sector seems probable in the medium term," she said. "However, the question is, is this something that will evolve organically or will it be mandated?"

Ms LeGal cited Canada as a successful model of consolidation, and argued that for newly merged schemes or providers, culture is "as important, if not more important" than good structures and processes.

"What seems clear is that the current structure and sheer number of funds isn't sustainable over time if we're serious about improving governance and efficiency in pension funds in general. The question must remain: what is best for our members?"

This consolidation may not require a complete upheaval of the own-trust system. Nico Aspinall, chief investment officer at master trust The People's Pension, said routes to economies of scale could include fiduciary management rather than employers relinquishing all control.

But panellists agreed that small schemes will struggle to access illiquid markets at a fair price, which is now a core requirement of good value plans.

Michelle Ostermann, managing director of RPMI, pointed to the decline of publicly traded UK companies, by more than half: "There is an opportunity cost if [a scheme] doesn't prepare itself to be able to participate in the private markets."