UK pension managers have objected to government plans to force the creation of a series of “megafunds”, arguing it could stifle competition and hamper investment returns.

Fund managers say that the government should focus on optimising value for savers rather than applying an “arbitrary” scale test for pension funds that could discourage new market entrants and force some funds to merge with underperforming peers.

The criticisms come after the government said last year defined contribution (DC) workplace pension schemes should consolidate in order to reach to at least £25bn in assets per fund by 2030. Ministers hope this will boost investment into British infrastructure and fast-growing companies and lower the operating costs of the funds.

But industry figures warn of unintended consequences of applying a scale test and are sceptical it would achieve the government’s aims of better fund performance and higher investment in domestic assets.

“We’re obviously supportive of scale benefits but what we don’t want to do is create an oligopoly . . . we are concerned that with what’s being proposed competition and innovation will suffer and we’ll end up more like a utility market where there’s a lot of issues as we know,” said Jamie Fiveash, chief executive at Smart UK and Ireland, one of the most acquisitive DC pension schemes.

The UK currently has around 60 multi-employer DC pension schemes with combined assets forecast to reach £800bn by the end of the decade. In a consultation that closes later this week, the government said its proposals would result in a “much smaller” number of schemes.

Chancellor Rachel Reeves said the proposals, together with merging the assets of local government pension funds, would unlock up to £80bn for investment in UK infrastructure and small scale-up companies.

However, pension managers have questioned the government’s methodology, which compared UK defined contribution funds — which are estimated to have about 4 per cent of assets in private equity and infrastructure — with Australian superannuation funds, which tend to be larger and have 13 per cent across the two asset classes.

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