Pension “mega funds” will be established as part of government initiatives to boost infrastructure investment.
According to Treasury proposals, reforms could lead to the creation of funds that could release £80 billion in investments, with the aim of achieving greater returns through fewer but larger funds.
Chancellor Rachel Reeves is looking to emulate the successful models of large Canadian and Australian pension schemes.
This move is described as “the most significant set of pension market reforms in decades” and more details will be provided in a speech by Reeves at Mansion House on Thursday evening.
Consolidating almost 90 local government pension funds, merging defined contribution schemes, and pooling assets are part of the government’s strategy to enhance economic growth through infrastructure investment.
The government argues that pension schemes can achieve higher returns when they reach £20bn to £50bn, enabling them to invest in a broader range of assets, citing successful examples from Canada and Australia where investments in infrastructure have been significantly higher than in the UK.
Rachel Reeves wants to reform pensions. Pic: PA
Pensions minister Emma Reynolds stated that larger pension schemes can diversify their investments, including in higher-risk assets like private equity, which can yield higher returns over time.
The government will not mandate pension fund managers to increase private equity investments but due to the larger scale, they will have the flexibility to invest in a wider range of assets similar to what is seen in Canada and Australia.
Reynolds highlighted the disparity where Canadian teachers or Australian professors are more likely to invest in British infrastructure or high-growth companies compared to British savers, which she deemed as “inappropriate.”
The chancellor believes that these changes will unlock substantial investments in business and infrastructure, enhance retirement savings, and drive economic growth across the country.
However, Tom Selby from AJ Bell urged caution, emphasizing the need for transparency and clarity for members on how their funds are being utilized to stimulate economic growth.
The government ensures that these funds will be regulated by the Financial Conduct Authority and must adhere to stringent standards to benefit savers.
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Local government pensions versus defined contributions
The Local Government Pension Scheme in England and Wales is projected to manage assets worth approximately £500bn by 2030, currently divided among 86 administering authorities.
Under the government’s plan, management of local government pensions and their investments will be transferred from local officials to professional fund managers, aiming to boost investment in infrastructure for the benefit of 6.7 million public servants.
Defined contribution pension schemes are expected to oversee assets worth £800bn by the end of the decade, distributed across around 60 multi-employer schemes investing in multiple funds. The government plans to consult on setting a minimum size requirement for these funds.
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Businesses cautious – but pensions sector backs plans
Following the budget fallout, the Confederation of British Industry (CBI) emphasized the importance of reassuring businesses about the government’s plans.
CBI’s chief economist Louise Hellem stressed the need for a solid strategy to mobilize investments and ensure competitiveness and profitability in businesses affected by additional costs and limited investment capacity.
The pensions sector, including Standard Life, Royal London, Local Pensions Partnership Investments, and the Pensions and Lifetime Savings Association, endorsed the government’s initiatives.
Deputy Prime Minister Angela Rayner highlighted the potential of using pension funds belonging to millions of people to boost the economy positively.