"Through consolidation of the DC market and Local Government Pension Schemes into megafunds, previous domestic and international experience suggests that we could unlock around £80bn for investment in private equity"
- Chancellor Rachel Reeves
Chancellor Rachel Reeves has announced a series of reforms to the pension system in her maiden Mansion House speech.
Two consultations will be published ahead of the Pension Schemes Bill in the Spring to merge defined contribution pension schemes and the Local Government Pension Scheme in England and Wales into megafunds – mirroring the pensions landscape in Australia and Canada. Reeves says this, along with reforms to ensure better value from these pension schemes, could unlock around £80 billion new investment in businesses and infrastructure, while boosting savers’ pension pots.
The Chancellor announced that the British Growth Partnership has secured the support of two UK pension funds for its future launch. Aegon UK – as a substantial cornerstone investor – and NatWest Cushon, who have combined assets worth over £219 billion, have both agreed to work with the British Business Bank with a view to investing in the UK growth companies of the future, subject to commercial and regulatory steps and, where appropriate, agreement from the Trustees.
During last night's speech, Reeves said: "Australian pension schemes invest around three times more in infrastructure investment compared to Defined Contribution schemes in the UK and 10 times more in private equity, including in high growth businesses, compared to the UK.
"One of the key reasons for this is the much larger size of their funds while our pensions landscape remains highly fragmented. That means many of our pension funds do not have the capacity to invest at the scale required.
"And more often than not, it is Canadian teachers and Australian professors reaping the rewards of investing in British productive assets through their pension schemes rather than British savers. That’s not good enough and we need to change that.
"So tonight, we are publishing the interim report of the Pensions Investment Review. It sets out our plans to create Canadian and Australian style-“megafunds” to power growth in our economy and start the most significant set of changes to the pensions landscape since the Turner Review, underpinned by a clear commitment to legislate for these changes for the first time in the Pension Scheme Bill next year.
"We will deliver a significant consolidation of the Defined Contribution market to enable schemes to deliver better saver outcomes while investing to support growth.
"And we will legislate on measures to consolidate the Local Government Pension Scheme, one of the largest pension schemes in the world, and require that the 86 Local Government Pension Scheme administering authorities consolidate all their assets into 8 pools.
"Through consolidation of the DC market and Local Government Pension Schemes into megafunds, previous domestic and international experience suggests that we could unlock around £80bn for investment in private equity, including exciting growth businesses and in vital infrastructure projects including transport, energy and housing projects here in the UK."
During the speech, Reeves also said that regulatory changes after financial crisis created a system which sought to eliminate risk taking "that has gone too far" and led to unintended consequences.
She said: "While it was right that successive governments made regulatory changes after the Global Financial Crisis, to ensure that regulation kept pace with the global economy of the time, it is important that we learn the lessons of the past. These changes have resulted in a system which sought to eliminate risk taking. That has gone too far and, in places, it has had unintended consequences which we must now address."
The Chancellor also announced an upcoming FCA consultation to help households make better-informed decisions about their finances, as part of the government and regulator’s joint Advice Guidance Boundary Review.
Pension experts share their thoughts:
Jamie Jenkins, director of policy at Royal London, commented: "The Government has set out a plan to have fewer, larger pension schemes. While scale itself does not deliver better retirement outcomes for savers, there is evidence from comparable pension systems in Australia and Canada that there is a point of critical mass whereby it is easier to invest in longer-term, illiquid assets. This could give rise to greater returns, but also affords more capital for investment in vital infrastructure and growth areas of the economy.
"It is encouraging to see the level of detail in the consultation to fully unearth how scale operates at present, and whether this is achieved within the scheme or investment layer of the various pension propositions in the market."
Lily Megson, policy director at My Pension Expert, said: “The Chancellor’s ambition to create ‘pension mega funds’ to fuel UK growth is well-intentioned, but savers need transparency and involvement in decisions that impact their retirement funds. Committing to the "biggest pension reforms in decades" is not a positive boast if consumers - those people whose hard-earned pension savings is at stake - are not properly informed and engaged with, helping them understand both the potential returns and risks.
“Using pension funds to simultaneously boost investment into UK industries, trigger economic growth and improve the performance of those funds is, of course, all positive. But it cannot come at the expense of financial security for retirement planners. What's more, truly meaningful, radical pension reform must address a much broader range of issues that blight the country's pensions market – such as limited pension engagement, the gender gap, lack of financial literacy, and limited access to guidance and advice.
“To properly support UK savers, we need a balanced approach – one that doesn’t sacrifice long-term financial security in the pursuit of UK economic goals. Savers need confidence that their retirement is the priority, not just a means to balance the books.”
David Piltz, CEO of Gallagher’s benefits & HR consulting division in the UK, added: “While the potential benefits of consolidation are widely acknowledged—such as the ability to negotiate lower fees and access more sophisticated investment strategies—we must consider the other side of the equation, too. The key challenge here is balancing consolidation with the risk of creating concentration. While pooling assets can certainly lead to efficiencies, too much consolidation could leave us vulnerable, with pension funds overly concentrated in just a few large investments. Do we want our pension system placing all its eggs in just a few baskets?
“Once schemes reach a critical size, the benefits of consolidation can taper off. A framework should be created in which investments have to fight for their place across a wide range of independent pension portfolios. This ensures price competition, better due diligence, and reduces the risk of overexposure to underperforming investments.
“The move towards Canadian-style pension reform - merging Britain’s local authority pension schemes into a consolidated pension fund - could drive down administrative costs and streamline operations. However, it's worth noting that local authority schemes provide flexibility to match unique regional needs and risk tolerances. Centralising everything under a national fund could impose a one-size-fits-all model, which may not align with the goals of all local authorities or meet the needs of all beneficiaries. Overall, it does present an opportunity for greater returns, but it requires careful implementation to navigate the inherent challenges in such a major structural shift."
