UK pension funds must move beyond size to smarter investing
The UK pensions sector faces a critical transition where sheer size will no longer ensure success. Over the last 15 years, auto-enrolment and consolidation have swollen pension fund balances, yet the next hurdle is developing the expertise to deploy that capital effectively. Dan Mikulskis, chief investment officer at People’s Pension, explains that international research his team analyzed shows sophisticated asset owners can outperform passive strategies by roughly 0.25% to 0.75% annually at comparable risk levels. Over a working lifespan, this gap could translate to an extra £100,000 in retirement wealth.
Size alone proves insufficient. The most effective institutions pair scale with disciplined decision-making frameworks. Some handle core operations internally while outsourcing niche functions—such as private equity or index-tracking—to specialists, but always retain strategic control. The defining factor is clarity: identifying which choices carry the most weight and ensuring governance aligns with those priorities.
A hybrid model emerges as the most reliable approach. Funds that manage private equity allocations in-house but delegate trade execution to external experts often achieve better results than those attempting to control everything or outsourcing too much without oversight. The UK’s defined contribution system has thrived on simplicity, low costs, and liquidity. But as funds expand, the focus must evolve from cost reduction to capability enhancement, specifically, determining how to allocate capital and who bears responsibility for those choices.
Mikulskis emphasizes that the most impactful asset owners will not necessarily be the largest or cheapest. Their success will hinge on converting scale into superior investment decisions, ultimately benefiting members. The industry’s progress now depends on whether consolidation leads to more adaptable, results-driven institutions. Early signs suggest funds must shift from efficiency-driven growth to building the skills needed to act as true long-term capital stewards.
The research examined how larger UK pension funds could use their growing influence to stimulate economic growth. Sophisticated asset owners with long-term horizons can directly shape domestic markets by directing capital toward productive sectors like infrastructure or private equity, areas where banks or short-term investors typically underperform. However, this requires funds to actively identify opportunities aligned with their strategic goals rather than passively replicating benchmarks.
The study warns against over-centralization in either direction. After adopting a hybrid model, retaining oversight of strategic deals while outsourcing trade management and risk monitoring, the fund improved both performance and operational efficiency. This shift demonstrated that rigid approaches, whether fully insourced or outsourced, create operational blind spots.
The distinction between ownership and execution became central to the findings. The most resilient institutions first defined their “investment identity” before structuring operations. This involved answering core questions: Which risks are acceptable? Which markets or sectors match long-term objectives? And who, within the organization or its partner network, will uphold those choices? Without these clarifications, even large funds risk becoming passive asset collectors rather than active capital stewards.
