Pension pots set for boost under Reeves’ plans for new ‘megafunds’

Up to £80bn will be unlocked for investment in new businesses and critical infrastructure with the creation of new pension “megafunds” under major government reforms.

Rachel Reeves will set out the plans in her first Mansion House speech as Chancellor, which she will say marks the biggest shake-up of the pensions system “in decades”.

Reeves hopes the reforms will create Canadian-style pension investment funds, similar to the Ontario Teachers’ Pension Plan, which is one of the world’s biggest institutional investors, and will free up billions to invest in the UK.

But economists have raised concerns about the changes, warning the needs of individual savers’ could be lost under the Treasury’s drive for greater investment and economic growth.

The changes will be introduced via a new Pension Scheme Bill next year that will allow the Government to consolidate local government pensions and pooling the assets from 86 local government pension scheme authorities.

The Local Government Pension Scheme – defined benefit schemes in which workers build up an entitlement to an annual income for life, which is paid from the scheme rather than their own individual pot – and which is paid in England and Wales, will manage assets worth about £500bn by 2030.

These assets are currently split across 86 different administering authorities, with local government officials and councillors managing each fund.

Consolidating the assets into a handful of funds run by professional fund managers will allow them to invest more in assets such as infrastructure, supporting economic growth and local investment on behalf of the 6.7 million public servants, the Government said.

Additionally the government will consult on ensuring defined contribution private sector pension funds have a minimum size in order to make them more viable for investment – such as turning them into mega funds.

A defined contribution is when you and your pay and your employer pay into pot, which is invested so it grows, for your retirement.

The pension schemes are set to manage £800bn worth of assets by the end of the decade.

There are about 60 different multi-employer schemes – funds in which more than one employer contributes –each investing savers’ money into one or more funds. The Government will consult on setting a minimum size requirement for these funds.

The Treasury believes the moves will deliver about £80bn of investment in new businesses and critical infrastructure.

It is envisaged that the investment will result in better returns for pension funds, which would lead to higher pensions for an individual’s private pension pot.

The Chancellor’s speech on Thursday comes amid growing criticism from businesses that her changes to employers’ national insurance contributions will lead to job losses and potentially stifle growth.

Ms Reeves will say in her speech: “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.”

Deputy Prime Minister Angela Rayner said: “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.”

The Treasury said its analysis indicates that pension funds start to deliver greater productive investment levels once the size of assets they manage reaches between £25bn to £50bn – a point where they are better placed to invest in a wider range of assets.

Bigger pensions funds of greater than £50bn in assets can harness further benefits, including the ability to invest directly in large-scale projects at a lower cost, it added.

But Tom Selby, director of public policy at AJ Bell, said the reforms may provide better economies of scale for the Treasury, but warned there were risks for individual savers.

“Conflating a government goal of driving investment in the UK and people’s retirement outcomes brings a danger because the risks are all taken with members’ money,” Selby said. “If it goes well, everyone can celebrate. But it’s clearly possible that it will go the other way, so there needs to be some caution in this push to use other people’s money to drive economic growth.”

The Treasury said the new megafunds will need to meet rigorous standards to ensure they deliver for savers, such as needing to be authorised by the Financial Conduct Authority (FCA).

Louise Hellem, CBI Chief Economist, said: “Chancellor Rachel Reeves is right to focus on how to boost investment, increase saver returns, and modernise our pensions system. The UK has the second largest pool of pensions assets in the world so finding ways to reorient them towards long-term investment in businesses and infrastructure could drive economic prosperity.

“This has the potential to be good for investment and good for savers. Employers themselves will be supportive of these measures if they deliver overall economic growth and don’t add significant costs in implementation.”