Navigating a new era in UK DC pensions

The UK defined contribution (DC) pensions market has entered a decisive decade in which scale, value for money and end-to-end retirement propositions will determine which providers remain relevant by 2035. Regulatory reform is deliberately forcing consolidation, raising the bar on investment performance and accelerating innovation in decumulation and customer support.

The scale and depth of the change ahead will require firms to implement material transformation over tight timeframes.

In this insight, we look at the key actions different types of players should prioritise now to secure their place in the DC market of 2035.

State of the market

The UK multi-employer DC market includes some insurers and investment platforms. In addition, the authorisation regime for Master-trust structures in 2018 led to many new entrants to the auto-enrolment market. This has resulted in three distinct groups of providers in the current landscape.

These three groups of players will have different challenges and priorities when facing the material changes ahead which will inform their action plans.

We have identified three key areas of action:

1. Consolidation pathway – Many multi-employer providers, except the largest Auto Enrolment firms and life insurers have some way to go to meet the consolidation threshold of £25bn in a single default arrangement. Some will need to embark in concerted internal consolidation, while others will be subject of M&A activity.
2. Investment strategies will come to the fore and will need serious consideration since low Value for Money ratings could mean the end of low performing schemes and result in further consolidation.
3. Product and distribution innovation – the need to offer decumulation solutions as a default option will spur innovation. Firms offering a wider combination of products and channels of distribution might finally succeed in more effective customer engagement and improve retirement outcomes.

Below we explore each area in more detail.

1. Preparing for significant consolidation

The 2026 Pension Schemes Act’s  £25bn scale test is set to redraw the UK DC landscape by 2030/5. This will reduce the number of multi-employer default arrangements significantly, from hundreds of different schemes to just a few by 2035. Firms will need to build a highly efficient scheme acquisition and integration programme to grow from their current positions if they are to meet the scale test.

A material source of fuel for this growth will come from the c.800 single-employer trusts schemes (non-micro), which will also be subject to VfM assessment from 2028 and may seek to consolidate into a MT ahead of that deadline to secure good outcomes for their members.²

Different providers will face different consolidation challenges. For example, for the 8 or so AE MTs and Investment Platforms (part of Group B and C) managing less than £10bn DC AuM, the scaling challenge will be greatest, likely having to apply to DWP/HMT for a 5-year extension and demonstrate a “credible” trajectory towards reaching the £25bn target.³ DWP research suggests that schemes with more than £5bn in assets may be able to build sufficient organic growth by 2035 to meet the scale test⁴. Whilst this is theoretically possible, volume will only be one parameter in this journey. Smaller MTs will also need to keep nurturing and protecting the niche that makes them special (or developing one), be it by serving specific types of employers, offering a top tech platform or best in class investment expertise. For small schemes willing to divest, this specialisation will likely be of interest to prospective buyers. For example, in recent scheme acquisitions, a primary motive for the buyer was to gain access to the target scheme's client base and gain entry into new market segments.⁵

The large waterfront providers in Group A will be looking at acquisition opportunities. Buyers will likely look for two elements in acquisition targets: first, potential to build synergies easily to build scale at low costs; and second, innovative solutions to develop a competitive approach to DC products, investments, and operations to allow them to compete with other superfunds in 2030. Key areas of focus for both buyers and vendors will include:

• Strategic alignment: firms will need to articulate how their technology, investment capabilities, and market position will position them within the DC 2030 landscape. This can then inform the specific M&A strategy to pursue. Given the breadth of reforms in progress, costs synergies will be one important driver. However, buyers will consider how an acquisition can enhance customer engagement, improve investment performance or boost product innovation.
• Investment strategy and expertise: buyers are likely to seek a target with investment risk appetites within range of their current approaches to facilitate integration. However, as performance will form a key part of the VfM assessment, buyers may also look into performance improvement or enhancing diversification. A premium might be placed on a target’s unique asset class expertise or strong relationships with high-performing investment managers.
• Technology platform: acquirers will assess a target's platform for ease of integration with existing systems or its potential to introduce differentiating innovation.
• Operational and data readiness: last but not least, data quality and granularity are crucial for a smooth acquisition due diligence process, but also to be able to quickly roll out DC innovations across the group. Many of these innovations will rely on data availability and quality (e.g., Guided Retirement or targeted support).

Beyond external consolidation, larger providers may also have a significant number of default arrangements to consolidate internally. Whilst the scale test will not be a direct challenge for them, the need to carry out VfM assessments across their multiple legacy products puts some firms under significant pressure to accelerate the internal consolidation work. This internal consolidation should be facilitated by the new contractual override regime.

Across internal and external consolidation, operational capabilities will be a key differentiator. Firms looking to grow in the consolidating market should focus on enhancing their capability for single trust onboarding and integration. There are potential lessons to be learnt from Bulk Purchase Annuity (BPA) firms’ operational experience and culture. BPA insurers have developed deep and valuable experience to optimise DB employer schemes onboarding, ensure smooth transition to scheme buyouts, build efficient governance over transfers and partner up strategically with third party administrators.

From a governance perspective, the composition and training of (MTs’) board of trustees or GPPs’ Independent Governance Committee (IGCs) may need significant reinforcing to face these challenges. Appointing professional trustees with extensive scheme integration experience, M&A, transformation, or BPA practices knowledge may prove particularly useful.

2. Investment strategy and value

Investment performance – will also determine winners under VfM framework proposals. Under these proposals, the performance assessment could include both backward (up to 5 years) and forward-looking metrics, allowing firms to take credit for future changes to their investment strategies. Those schemes found to be underperforming after a period of time⁶ will be required to transfer their members to a higher performing scheme, raising the performance stakes for the whole market.

With the regime expected to take effect from 2028, investment strategies need reviewing now if they are to make a difference when the new regime is implemented – backward looking metrics will cover data from 2023 onwards.

Design and implementation of a new investment strategy should also be aligned to the firm’s Mansion House commitments, committing to greater asset allocation into UK/private assets. The take up has been slow so far for insurers (see Table 1), but we expect increases in private asset allocations in default arrangements in the next few years.

Since a large part of the industry will shift to increase investments into potentially similar illiquid classes, there is potential for increased concentration risk and market movements over these next few years. Investment strategists and risk teams should consider the need to strengthen processes and controls around the valuation, pricing and liquidity risk management of their illiquid exposures. The Pensions Regulator (TPR) has already warned 58 schemes about the risks of private market exposures mark-downs recently, and it will likely keep scrutinising that space to safeguard scheme members’ interests.

In this context, different solutions can help firms to strike a new balance between risk, costs and value. Some firms are considering setting up a dual default arrangement with different levels of exposure to private markets. This will allow the broadening of the pool of solutions offered to employers whilst keeping a cost-effective option invested in “traditional assets” available in transition times. Importantly, early engagement with employers and trustees will be crucial to ensure they fully understand this paradigm shift towards approaches that balance performance, costs management and value.

Also, illiquid asset origination capabilities and deep investment expertise can provide avenues to differentiate from the market and diversify exposures. Firms lacking these capabilities may look out to strengthen them or acquire them through partnerships with e.g., investment managers.

3. Decumulation proposition and customer support

Scale and value will be the main drivers of consolidation, but decumulation products and customer support offerings will become more important for competitive advantage, allowing those that get it right to keep assets for longer and increase market share by delivering better retirement outcomes to their scheme members.

The government’s “Guided Retirement” initiative will require all DC providers to offer a suitable default decumulation solution to their customers; whilst the FCA is reviewing its customer support continuum regulations to increase customer engagement (Targeted Support, Simplified advice). The average size of DC pots will keep growing and customers are likely to seek more tailored products and services over time. To respond to this change, DC providers will need to enhance:

• DC propositions to adjust to customer expectations at retirement more closely. It means creating products adapted to both pre-retirement and later life (i.e., “phased”); as well as blending features to fulfil customers’ desire for income flexibility, high return and guarantees more closely. We expect longevity pooling solutions like CDCs or products blending different features like smoothed funds or wrappers with drawdown and deferred annuities to become increasingly common. Many firms will focus on developing suitable products for Guided Retirement. DC providers should consider how to incorporate product innovation more broadly into their offering (including via partnership) to differentiate in the eyes of employers and trustees likely to expect more from DC offerings in the next few years.
• Customer support offering: The FCA is looking to improve retirement outcomes by allowing firms new ways to engage with customers beyond Guidance and fully regulated advice. The new Targeted Support (TS) regime, coupled with Guided Retirement are clear examples. Firms will need to use these building blocks to create a coherent customer support offering that helps them meet customer needs while enabling their overall DC strategy. For example, firms focusing on growing AUM to meet the scale test, might want to prioritise TS journeys that also focus on adequacy of contribution levels and ensuring scheme members utilise their employers’ benefits such as contribution matching as effectively as possible.
• Deploying AI: AI has the potential to power hyper-personalised DC member journeys of the future. Customer-facing AI use cases remain nascent in financial services, but the expansion of Dashboards and Open Finance coupled with innovations like TS or DC pensions modellers will transform pensions distribution permanently. AI will have a role to play in it but will require careful oversight and gradual roll-out. As a result, the current regulatory shake up should prompt firms to re-evaluate their customer journey but also to consider how to weave in AI capabilities into their new offerings.

Now, the question is simple: what will it take to win in this market?

Depending on their current strengths and capabilities, firms will need to prioritise actions in the three key dimensions of consolidation, investment strategies and customer proposition and support offerings. Innovating and implementing changes on those three fronts at the same time will not be easy but we are of the view that it will be essential.

This insight is only an overview of the work done by the Deloitte team around the potential business, regulatory and operational implications of the DC pensions reforms. To receive more information or to arrange a discussion, please get in touch with the authors below.

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References

1. https://www.gov.uk/government/speeches/speech-at-the-pension-and-lifetime-savings-association-conference-2025
2. Occupational defined contribution landscape in the UK 2025
3. Schemes with £10bn AuM under their main default by 2030 may benefit from a further 5 years to reach £25bn threshold, where they can demonstrate a “credible plan for growth”
4. Pension Schemes Bill: Scale and Consolidation - GOV.UK
5. Examples include: WTW to acquire cutting-edge UK fintech pensions and savings provider, Cushon and Mercer agrees to acquire Cardano for undisclosed amount.
6. Likely to be three years as per the most recent FCA VfM consultation; CP26/1: The Value for Money Framework: Response to consultation, further consultation and discussion paper