Rachel Reeves unveils pension system overhaul

Rachel Reeves, the Chancellor, has announced plans to overhaul the UK’s pension system. She aims to merge the 86 council pension schemes into a few “pension megafunds.”

We are pushing ahead with the biggest set of reforms to the pensions market in decades:

🧱Unlocking billions of pounds of investment.

💷 Boosting people’s savings

📈 Driving economic growth. https://t.co/tzfuS3QsqL

— Rachel Reeves (@RachelReevesMP) November 14, 2024

NEW: @RachelReevesMP announces the biggest set of reforms to the pensions market in decades.

Unlocking billions of pounds of investment, boosting savings in retirement and driving economic growth.

More here 👇https://t.co/pmxYfODWil

— The Labour Party (@UKLabour) November 14, 2024

The government hopes these changes will lead to billions of pounds being invested in UK sectors such as energy infrastructure, tech start-ups, and public services. Reeves believes the current structure of UK public sector pension funds is not large enough to generate good returns for British savers. Workers in local government schemes currently have a defined benefit pension based on salary and service length. They will not see any changes to their payments under these plans.

I welcome this announcement, which I championed in Government. It is right that we follow the model of countries like 🇨🇦 and 🇦🇺 to leverage our investment potential, including in domestic priorities. https://t.co/xdKMGXcaRJ

— Oliver Dowden (@OliverDowden) November 14, 2024

Most private sector workers are in schemes that involve monthly contributions to a savings pot, with the eventual pension depending on the size of this pot at retirement. Reeves expressed admiration for the pension systems in Canada and Australia, where pensions of local government workers are pooled into large funds capable of making significant global investments. She stated, “They probably have the best pension funds anywhere in the world.” The government plans to merge the 86 council pension funds, which together include £354bn in investments, into “megafunds” managed by fund managers.

Reeves’ pension consolidation plan

While these new pension funds won’t be obliged to invest specifically in UK businesses or infrastructure, the aim is to create scale in the pension funds to unlock more substantial investments. Reeves argues that larger pension funds could drive increased investment into the UK economy, potentially unlocking £80bn worth of investment. She highlighted that it makes “no sense at all” that Canadian teachers and Australian professors are more likely to invest in long-term UK assets than British savers. Helen Morrissey from Hargreaves Lansdown described the UK’s pension fund market as “incredibly fragmented.” Combining smaller funds into larger ones could reduce administrative costs, increase investment returns, and improve bargaining power. However, some experts warn that smaller companies might be overlooked in favor of larger, safer investments. There are also concerns that the focus on UK-wide economic growth might compromise the goal of delivering the best outcomes for pension members. Shadow Chancellor Mel Stride stated that the Conservatives would closely review Rachel Reeves’s proposals, especially concerning the mandated areas for investments. While Rachel Reeves’ pension reform aims to stimulate economic growth and provide better returns for savers, it remains a contentious issue with potential risks and varying opinions on its effectiveness.