Plans to reform the UK pension market will create megafunds, unlocking billions in business and infrastructure investment, the government has announced.
Chancellor Rachel Reeves is pushing ahead with a shake-up of the pension fund system and will deliver a speech on government plans at Mansion House on Thursday.
Labour wants to introduce legislation next year that will merge funds currently managed by 86 local pension schemes.
The consolidated assets will then be allocated to professional fund managers to invest on behalf of 6.7 million public servants in the schemes.
It’s expected that the so-called megafunds will manage assets worth around £500 billion by 2030, which the Treasury hopes could unlock as much as £80 billion worth of investment in businesses and infrastructure. More than £20 billion in funding will be dedicated to invest in local communities.
In a statement, Reeves said on Thursday that following last month’s Budget and action to restore economic stability, the government is “now going for growth.”
Size Matters
Downing Street wants to reform the “fragmented” UK pension system, which is set to manage £1.3 trillion in assets by the end of the decade.The government said the system lacks the size needed to invest in business and infrastructure.
Under planned reforms, the mega pension pots will mirror the set-ups in Australia and Canada, where pension funds “take advantage of size” and can deliver investment in assets with higher growth potential.
Once the size of assets managed by pension funds reaches £25 billion to £50 billion, the return in investment capabilities increases significantly, analysis cited by the Treasury showed. Larger pension pools worth more than £50 billion in assets make investments in large scale infrastructure projects cheaper, it added.
“Harnessing the power of this multi-billion-pound industry is a win-win, benefiting future pensioners, and our wider economy,” said pensions minister Emma Reynolds.
Compared to the UK, Canada’s pension schemes are estimated to invest four times more in infrastructure, while Australian schemes invest around three times more and 10 times more in private equity.
Deputy Prime Minister Angela Rayner said “it’s about time” that people’s pensions started working to drive investment in local communities.
Better Value
Reeves will detail the plan to consolidate the assets, managed by 86 local pension schemes, into a handful of megafunds when she addresses senior bankers and company bosses on Thursday evening.She will tell them that the pension system overhaul will deliver better value from investment and free up money to support local public services in the long-term.
The proposed megafunds will be authorised by the Financial Conduct Authority, while the governance of the Local Government Pension Scheme will also be overhauled. An independent review will be launched to ensure that each of the 86 local pension schemes is fit for purpose.
Responding to pension reforms, the Confederation of British Industry (CBI) said that Reeves is right to focus on boosting investment and increasing saver returns.
“Employers themselves will be supportive of these measures if they deliver overall economic growth and don’t add significant costs in implementation,” said CBI Chief Economist Louise Hellem.
She added that with costs “piling” on firms as a result of budgetary tax hikes, there is a need to keep business confidence high.
“Pension schemes will want to operate within a UK economy that is prospering,” Hellem said.
