The government has outlined plans for a major overhaul of the UK pension industry, including the creation of £25bn “megafunds” to boost local investment and spur economic growth. The plan, inspired by models from Australia and Canada, aims to enhance pension returns for workers while driving billions in investments into clean energy and high-growth sectors. Chancellor Rachel Reeves commented, “These reforms mean better returns for workers and billions more invested in clean energy and high-growth businesses.”
Seventeen of the UK’s largest pension firms have already agreed to the core of these reforms through a voluntary agreement.
However, a legislative backstop will be implemented, allowing the government to enforce the new rules if sufficient progress isn’t made by the end of the decade. While the government does not anticipate using these powers, this element might face criticism from those in the industry who oppose mandated investment directions. Chris Rule, CEO of the Local Pensions Partnership, indicated that many pension funds already invest locally.
“The challenge for investment into the UK has been finding good investments to make – and policy that may improve that supply side is probably just as important,” he added. Zoe Alexander, a director at the Pensions and Lifetime Savings Association, acknowledged the significant implications for pension schemes but noted the potential for improved retirement outcomes through better governance and investment diversification. Miles Celic, CEO of TheCityUK, voiced support for the chancellor’s assertion that this move could help drive economic growth.
UK pension industry transformation outlined
Sir Steve Webb, former Liberal Democrat pensions minister and now a partner at consultants LCP, hailed the news as transformative for pension schemes and the wider economy. Under the plan, the 86 different local authority pension schemes currently providing for more than six million people, predominantly low-paid women, will merge into just six asset pools by March next year.
Local investment targets will be set for these defined benefit schemes for the first time, the Treasury stated. Defined contribution schemes worth £800bn, covering millions of other private and public sector workers, will also be consolidated. By 2030, the government expects more than 20 pension funds will each be worth over £25bn, in contrast to the current 10.
As part of the voluntary agreement known as the Mansion House accord agreed in May, 17 firms committed to investing 10% of their assets in areas other than publicly traded shares, promoting funding for homebuilding, infrastructure projects, and start-up businesses in fast-growing sectors. Additionally, 5% of investments will be allocated to UK assets. These reforms will be included in the upcoming Pension Schemes Bill.
The Treasury predicts that this new approach could result in over £50bn of additional investment in UK infrastructure, homes, and businesses. The final report from the Pensions Investment Review states that these reforms could lead to higher returns for pension savers through reduced waste, economies of scale, and better investment strategies, potentially boosting the average worker’s pension pot by £6,000.
