UK government proposes pension reforms to unlock £80bn of investment

The UK’s chancellor of the exchequer Rachel Reeves is due to propose merging Local Government Pension Scheme (LGPS) assets and consolidating defined contribution (DC) schemes into “megafunds” to unlock £80bn of investment for infrastructure projects and businesses of the future, the Treasury has confirmed.

The Treasury said that after her inaugural Budget last month, Reeves will use her first Mansion House speech as chancellor tonight to announce bold action to tackle the fragmented UK pensions landscape, deliver investment and drive economic growth – which is the only way to make people better off in retirement.

The Mansion House speech is an annual policy statement by the chancellor, delivered at the official residence of the Lord Mayor of the City of London.

The reforms are expected to be introduced through a new Pension Schemes Bill next year, and will create so-called “megafunds” by consolidating DC schemes and pooling assets from the 86 separate UK local authorities’ pension funds.

The Treasury says these funds are intended to mirror set-ups in Australia and Canada, where pension funds take advantage of size to invest in assets that have higher growth potential, which could deliver around £80bn of investment in exciting new businesses and critical infrastructure while boosting DC savers’ pension pots.

LGPS

Under the proposal, LGPS funds will manage assets worth around £500bn by 2030. These assets are currently split across 86 different administering authorities, managing assets between £300m and £30bn, with local government officials and councillors managing each fund – many of which use the UK’s existing eight investment pools.

The government said that consolidating the assets into a handful of megafunds run by professional fund managers will allow them to invest more in assets like infrastructure.

The megafunds will be authorised by the Financial Conduct Authority (FCA) and the government said the governance of local schemes will also be overhauled to deliver better value from investment decisions.

The government added that each administering authority will be required to specify a target for a pool’s investment in their local economy, working in partnership with Local and Mayoral Combined Authorities to identify the best opportunities to support local growth. It added that if each administering authority were to set a 5% target, that would secure £20bn of investment in local communities.

A new independent review process will be established to ensure each of the 86 administering authorities is fit for purpose, the government added.

DC schemes

For DC schemes, which the government pointed out are set to manage £800bn worth of assets by the end of the decade, it will consult on setting a minimum size requirement to ensure they deliver on their investment potential.

The government will also consult on measures to facilitate this consolidation into megafunds, including legislating to allow fund managers to more easily move savers from underperforming schemes to ones that deliver higher returns for them.

Reeves said: “Last month’s Budget fixed the foundations to restore economic stability and put our public services on a firmer footing. Now we’re going for growth.

“That starts with the biggest set of reforms to the pensions market in decades to unlock tens of billions of pounds of investment in business and infrastructure, boost people’s savings in retirement and drive economic growth so we can make every part of Britain better off.”

Pensions minister Emma Reynolds, added: “Harnessing the power of this multi-billion-pound industry is a win-win, benefiting future pensioners, and our wider economy.

“These reforms could unlock £80bn of investment into exciting new businesses and critical infrastructure.”

The interim report will be published after the chancellor’s Mansion House speech later tonight. The Treasury added that the final report of the Pensions Investment Review will be published in the Spring and the review will continue to take account of the need to prioritise Gilt market stability, liquidity and diversity.

Reactions

The Pensions Regulator (TPR) has welcomed the chancellor’s “bold” reforms.

Nausicaa Delfas, TPR’s chief executive officer, said the reforms will accelerate the move towards a consolidated market of fewer, larger pension schemes better equipped to deliver for savers and invest in the UK economy.

“Backed by new powers, we can make sure larger schemes deliver real value for money for pension savers and raise standards across the market”

Nausicaa Delfas, TPR’s chief executive officer

She said: “Backed by new powers, we can make sure larger schemes deliver real value for money for pension savers and raise standards across the market, while also encouraging innovation in new models.”

Zoe Alexander, director of policy and advocacy at the Pensions and Lifetime Savings Association (PLSA), said that larger pension schemes can help achieve better outcomes for savers through economies of scale, stronger governance, negotiating power and additional resources.

She said: “We support consolidation where it is in the interests of members and represents value for money. 

“These are a positive set of ambitions from the government and for the sector. We look forward to working through the details of the proposals so that they work for savers and schemes.”

Tess Page, head of UK wealth strategy at Mercer, has also welcomed the direction of travel confirmed by the government ahead of the Mansion House speech.

“A smaller number of world-class schemes, with the scale to invest and support savers, is a welcome vision,” she noted.

However, she said that while further consolidation is welcome, it is unlikely to be a panacea across the board. “We are surprised not to see more focus on single employer DC schemes, which we think was a missed opportunity.”

She explained: “In the LGPS area we agree there are rational reasons to pool assets to achieve economies of scale, but any potential incremental savings from further consolidation needs to be balanced against the significant costs and disruption consolidation of the existing eight pools would entail.”

Page added that given the previously stated focus on fuelling UK growth, Mercer was also surprised not to hear more at this stage on potential incentives and ideas where pension funds could play a bigger role.

“That said, we are pleased to see that decision-making bodies will continue to be able to make investment decisions without mandating certain allocations,” she added.

However, Page warned that there still needs to be viable investments in the UK for pension funds to invest in to ensure they can achieve the best returns for members.

“We welcome all initiatives to make it easier for institutional investors to invest at scale in UK opportunities, for example the BBB Growth Fund, National Wealth Fund and the recently announced Social Impact Fund. These should also be combined with incentives, either through the tax system or through other risk-sharing mechanisms. Otherwise, decision-makers and fund managers are likely to arrive at the same conclusion that there are more attractive investments for their members elsewhere,” she concluded.

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