"How can scale be achieved? And how big is big enough?" asks Muse Advisory's director Mark Hodgkinson.

The future is defined contribution (DC). As we retrain our focus from defined benefit (DB) to DC it is easy to agree with The Pensions Regulator (TPR) that securing "good outcomes" for members is going to require high quality governance.

The only alternative seems to be a huge dose of luck but that is unlikely to inspire widespread member confidence as, month by month, millions of employees are auto-enrolled into DC plans.

A few months back I wrote some thoughts on the subject of governance costs in DC plans. Ultimately, unless there is an altruistic employer willing to meet such costs or the plan is effectively subsidised by a DB scheme that conveniently cohabits the same trust, then governance costs represent a leakage from members' retirement accounts and need to be justified on grounds of value. That is one reason why TPR emphasises the advantages of scale in DB provision. In theory, while governance costs are not directly proportionate to the size of the plan, the larger the plan, the smaller the cost per member or per £ invested.

So how can scale be achieved? And how big is big enough? Decision makers need help to understand this issue better. Only a small proportion of employer schemes can stand alone and achieve real scale. For most employers the route to scale may be via a large insurance company's platform or by signing up with NEST or through a master trust. With the exception of large employer schemes and NEST, the other options all involve profit-making entities and those profits can only derive from a call on members' retirement accounts through fees. NEST, although not a profit-making venture will need to run at a surplus in order to repay the substantial funding provided by the tax payer to get the initiative up and running. Call it surplus or call it profit, it means less money invested in members' accounts.

But we should not just look at costs. If (and how big an 'if' is it?) competition between providers results in great governance standards, which in turn result in better outcomes for members, then the result might be a virtuous circle of money well spent. But will members give thanks to the shareholders who have backed the provider and be happy to reward them with a stream of dividends funded from their retirement accounts? Now I'm starting to see quite a few 'if's emerging! But is there a viable alternative that doesn't rely on the profit motive?

For some time I have mused over the potential advantages of auto-enrolment compliant DC plans promoted by affinity groups. Some natural contenders might be: chambers of commerce and industry based employers' federations or trade unions. They would each have the potential for scale and could offer governance structures that may be less remote from members, with a consequential benefit of established communication channels and, maybe, some element of pre-existing trust with the sponsor.

I know I am not alone in giving thought to affinity based DC plans but, sadly, there is no evidence to suggest we will see sponsors stampeding into the DC pensions arena via this route. Maybe I have overlooked some obvious objections and will need to muse some more.

Written by Mark Hodgkinson, director, Muse Advisory

mark@museadvisory.com