In 2023 the chancellor announced in his Mansion House speech that the government’s policy was to “facilitate a programme of [defined contribution] consolidation, to ensure that funds are able to maintain a diverse portfolio of bonds, equity and unlisted assets and deliver the best possible returns for savers”.
Fast forward a year and Mercer’s recent announcement that it will be acquiring Cardano, and with it NOW Pensions, appears to play strongly into this pension consolidation agenda.
For starters, Mercer is a part of the Mansion House Compact, whose signatories promised to achieve a 5 per cent allocation of their default funds to unlisted equities by 2030.
This deal brings NOW, which did not sign the original compact, into the fold.
More generally, the deal fuses together a master trust aimed at the very largest employers (according to data published by Go Pensions, Mercer’s average membership per employer was 3,200 as at the end of 2023) with one aimed at the small and medium-sized employers that make up the vast majority of the auto-enrolment market (NOW’s average membership per employer was just 73).
The result suggests the silos in the market, where the investment consultants focused on the very largest clients and the AE master trusts focused on the very smallest, may be starting to break down.
Mercer can now position itself as an end-to-end UK DC provider, able to service all needs, from the most sophisticated and complex corporate clients to the most straightforward default-focused AE employers.
In this way, the combined Mercer/NOW offering looks like the poster child for what the government is trying to achieve.
Mercer will be the third largest provider by members, with 2.4mn members largely supplied by NOW, and will become the fifth provider to have more than £10bn in UK DC master trust assets (joining the ranks of Nest, L&G, The People’s Pension and LifeSight).
The result could also have a positive outcome for clients when it comes to investment returns, especially in light of another key government policy objective: the introduction of value-for-money benchmarking.
NOW’s struggles with performance over the past couple of years have been well documented, especially in the period of market turmoil at the end of 2022.
This deal gives it access to Mercer’s longstanding AE investment capabilities, which could enhance the member outcomes when it comes to investment returns.
Replacing Cardano’s investment management of NOW with their own in-house solution could also enhance the returns available for Mercer from the overarching deal.
Slow progress
Despite these positives, the utopian uplands the government envisages of a DC pensions market dominated by a few mega end-to-end DC master trust providers with sufficient assets to be able to invest £50bn in “high growth companies” with just a 5 per cent allocation still seems some way off.
Although there has been much talk of consolidation, the number of authorised master trusts has only fallen from 38 in 2019 to 36 in 2023.
Even focusing on just the commercial master trusts, the numbers have fallen from 25 in 2019 to 19 in 2023, with most of the activity being focused on consolidation at the smaller end of the market.
