Government Plans Aim to Unlock Billions in Pension Megafunds

Reforming the UK pension market will lead to the creation of megafunds, unlocking billions in business and infrastructure investment, as announced by the government.

Chancellor Rachel Reeves is moving forward with a transformation of the pension fund system and will discuss government plans at Mansion House on Thursday.

The plan is for legislation to be introduced by Labour next year to consolidate funds managed by 86 local pension schemes.

These combined assets will then be entrusted to professional fund managers to invest on behalf of 6.7 million public servants in the schemes.

It is anticipated that these megafunds will manage assets totaling around £500 billion by 2030, potentially unlocking up to £80 billion in business and infrastructure investments, with over £20 billion allocated for investments in local communities.

In a statement on Thursday, Reeves mentioned that following last month’s Budget and actions to restore economic stability, the government is now focusing on growth.

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“This is the beginning of the most substantial reforms to the pensions market in years, aiming to unlock tens of billions of pounds in business and infrastructure investments, enhance retirement savings for individuals, and drive economic growth to benefit all regions of Britain,” she stated.

Size Matters

Downing Street is looking to revamp the “fragmented” UK pension system, which is projected to manage £1.3 trillion in assets by the end of the decade.

The government has highlighted that the current system lacks the scale required for investments in business and infrastructure.

As per the planned reforms, the mega pension funds will resemble those in Australia and Canada, where sizeable pension funds can invest in assets with higher growth potential.

Analysis cited by the Treasury indicates that once the assets managed by pension funds reach £25 billion to £50 billion, their investment capabilities significantly improve. Larger pension pools with assets exceeding £50 billion make investments in large scale infrastructure projects more cost-effective, it added.

“Utilizing the potential of this multi-billion-pound industry is a win-win situation, benefiting future pensioners and our broader economy,” stated pensions minister Emma Reynolds.

In comparison 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 expressed that it is high time for people’s pensions to be used to drive investments in local communities.

“This involves tapping into the unrealized potential of the millions of people’s pensions and using it to positively impact our economy,” Rayner remarked.

Better Value

Reeves will elaborate on the plan to consolidate the assets, currently managed by 86 local pension schemes, into a few megafunds when addressing senior bankers and company executives on Thursday evening.

She will emphasize that the pension system overhaul will result in better value from investments and release funds to sustain local public services in the long run.

The proposed megafunds will be authorized by the Financial Conduct Authority, and the governance of the Local Government Pension Scheme will also undergo a transformation. An independent review will be initiated to ensure the fitness of each of the 86 local pension schemes.

Responding to pension reforms, the Confederation of British Industry (CBI) noted that Reeves is correct in focusing on boosting investments and enhancing saver returns.

“Employers will support these measures if they foster overall economic growth without significant implementation costs,” stated CBI Chief Economist Louise Hellem.

She added that given the rising costs for firms due to budgetary tax increases, maintaining high business confidence is crucial.

“Pension schemes will want to operate within a UK economy that is flourishing,” Hellem concluded.