In her first Mansion House speech as Chancellor, Rachel Reeves has set her sights on reviving the UK's economic growth with a bold proposal to reshape the country's pensions market. Reeves unveiled plans to create "pension megafunds" aimed at unlocking up to £80 billion of investment for businesses and infrastructure projects across the UK. The move is designed to increase investment, improve the nation's infrastructure, and provide higher returns for pension savers, all while addressing concerns about the economic climate and the UK's attractiveness as an investment destination.
What are Pension Megafunds?
The cornerstone of Reeves’ reform is the Pension Schemes Bill, which will be introduced in 2025. The bill will consolidate defined contribution (DC) pension schemes and pool assets from 86 local government pension schemes. Currently, there are around 60 different multi-employer schemes investing savers' money in various funds. By creating larger, consolidated pension funds, the government believes these megafunds could have the scale and financial heft to make substantial investments in infrastructure and businesses.
The new megafunds will be modelled on successful schemes in Australia and Canada, where large-scale pension funds have been able to direct significant capital toward high-growth opportunities. These funds will leverage economies of scale, enabling them to invest in more productive and profitable assets. The government predicts that this shift could unlock up to £80 billion in investments, with funds having the potential to return greater investment yields once assets reach a size of £25 to £50 billion.
The Global Context: Inspiration from Australia and Canada
The idea of pension megafunds is not entirely new, with other countries, notably Australia and Canada already operating large-scale pension schemes with a focus on domestic investment. However, even these large funds face challenges in finding suitable domestic projects for investment. In Canada for example, only around 7% of pension scheme infrastructure investments are directed toward domestic projects, highlighting the difficulty of sourcing viable investments even for large pension funds.
Jon Greer, head of retirement policy at wealth manager Quilter highlighted this issue, noting that even in markets with well-established pension megafunds, finding appropriate local investments remains a challenge. This points to the need for careful planning and development of infrastructure projects that can absorb such large-scale investments.
Concerns Over the Size and Efficiency of Pension Funds
While the potential benefits of pension megafunds are clear, not everyone is convinced that bigger is always better. Sir Steve Webb, former pensions minister and now a partner at Lane Clark & Peacock (LCP), raised concerns about the risks of a “one-size-fits-all” approach. He cautioned that while larger funds could unlock greater investment potential, smaller, well-managed pension schemes that focus on the needs of their members shouldn’t be overlooked. Some smaller schemes offer excellent returns, heavily subsidised by employers, and could be at risk if the reforms force them to scale up without considering the specific needs of their members.
“There is a lot of work to be done to ensure these funds are investable and that the benefits of scale are realised without compromising the interests of the pension savers,” Webb said.
The Road Ahead
While the concept of pooling pension funds is not new in the UK, with previous attempts to consolidate local government pension schemes dating back nearly a decade, the proposed reforms represent a significant step forward. The pension megafunds will need to meet rigorous standards to be authorised by the Financial Conduct Authority (FCA), ensuring they deliver on their promises to pension savers and investors alike.
However, with business leaders already voicing concerns over the rising costs of employer contributions and other budgetary measures, there is a pressing need for Reeves to balance the goals of pension reform with the economic realities faced by UK businesses. The £26 billion increase in employers’ national insurance contributions, set to take effect in April 2025, is one such example of the growing cost pressures on businesses which could affect hiring and pay rises.
Ultimately, the government’s plans to create pension megafunds represent a bold and necessary step in fostering long-term economic growth, but their success will depend on careful execution, adequate safeguards for savers, and creating a competitive investment environment that delivers tangible benefits for the UK economy
