Chancellor, Rachel Reeves, is set to announce plans to create 'pension megafunds' in her upcoming Mansion House speech, as part of a "radical" set of pension reforms designed to unlock billions of pounds of investment in infrastructure and local projects.

Following her inaugural Budget last month, HM Treasury (HMT) confirmed that Reeves will use her first Mansion House speech to take "bold action" to tackle the fragmented pensions landscape, deliver investment and drive economic growth, arguing that this is the only way to make people better off.

The "radical" reforms, to be introduced as part of the new Pension Schemes Bill next year, would look to create megafunds by consolidating defined contribution (DC) schemes and pooling assets from the 86 separate Local Government Pension Scheme (LGPS) authorities.

Designed to mirror pension set-ups in Australia and Canada, these megafunds would be expected to take advantage of size to invest in assets that have higher growth potential, in an effort to boost investment in new businesses and critical infrastructure, while also improving DC savers’ pension pots.

However, HMT acknowledged that these megafunds will need to meet "rigorous standards" to ensure they deliver for savers, such as needing to be authorised by the Financial Conduct Authority.

Announcing the plans, the government stressed that whilst the UK pension system is one of the largest in the world, there is still fragmentation and a lack of scale needed to invest in exciting new businesses or expensive projects like infrastructure.

Indeed, its interim report on the Pensions Investment Review, to be revealed in full alongside the Chancellor's Mansion House speech, showed that pension schemes begin to return much greater productive investment levels once the size of assets they manage reaches between £25-50bn.

It suggested that pension schemes of this size are also better placed to invest in a wider range of assets, such as "exciting" new businesses and expensive infrastructure projects.

Larger pensions schemes with more than £50bn in assets can harness even more benefits, according to the interim findings, including the ability to invest directly in large scale projects such as infrastructure at lower cost.

This was also supported by evidence from Canada and Australia, as Canada’s pension schemes invest around 4 times more in infrastructure, while Australian pension schemes invest around 3 times more in infrastructure and 10 times more in private equity, such as businesses, compared to DC schemes in the UK.

Using these domestic and international examples as a benchmark, HMT estimated that consolidation of the LGPS and DC schemes into megafunds could unlock around £80bn of investment in productive investments like infrastructure and fast-growing companies.

The government is therefore consulting on plans to take advantage of pension fund size and improve their governance.

Picking up the pace on LGPS pooling

In particular, the government will be consulting on plans to consolidate LGPS assets into a handful of megafunds run by professional fund managers, in order to allow them to invest more in assets like infrastructure.

In addition to this, the government announced plans to "overhaul" LGPS governance, in an effort to deliver better value from investment decisions, with independent research suggesting that this could free up money in the long-term to support local public services.

These reforms, if taken forward, could also act as a boost for local economies, as HMT explained that each Administering Authority would be required to specify a target for the 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.

If each Administering Authority were to set a 5 per cent target, this would secure £20bn of investment in local communities, according to HMT.

Alongside these consultations, the government is set to establish a new independent review process to ensure each of the 86 Administering Authorities is fit for purpose.

All change for DC?

In addition to LGPS changes, the government will consult on setting a minimum size requirement for multi-employer DC funds to ensure they deliver on their investment potential.

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

Commenting on the plans, Reeves stated: "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 Britian better off.”

Pensions Minister, Emma Reynolds, also argued that harnessing the power of the multi-billion-pound pensions industry would be a "win-win", benefiting future pensioners, and our wider economy.

“These reforms could unlock £80bn of investment into exciting new businesses and critical infrastructure," she said.

Adding to this, Deputy Prime Minister, Angela Rayner, said: “We’ve all seen the fantastic work carried out day in, day out, by our frontline workers and it’s about time their pension started working just as hard by driving investment in their communities.

"This is about harnessing the untapped potential of the pensions belonging to millions of people, and using it as a force for good in boosting our economy.”

HMT confirmed that the final report on the Pensions Investment Review will be published in the spring and will continue to take account of the need to prioritise gilt market stability, liquidity and diversity.

---