The UK is aiming to create a series of "megafunds" with up to £80 billion ($102 billion) in new investment capacity, marking the largest overhaul of the British pension system in decades,
according to Finance Minister Rachel Reeves.
This initiative addresses the issue of significant under-investment by UK pension funds in domestic assets, which has been cited as a key factor behind the UK's sluggish economic growth.
Speaking ahead of her first Mansion House speech to the UK financial sector, Reeves outlined plans to merge approximately 60 defined contribution pension schemes and 86 Local Government Pension Schemes. The goal is to make these funds more efficient and sizable enough to support large-scale projects.
"Last month’s budget set the stage for restoring economic stability and strengthening public services. Now, we’re pushing for growth," Reeves said in a statement. "This involves the biggest reforms to the pension market in decades, unlocking tens of billions in business and infrastructure investments, boosting retirement savings, and fueling economic growth to benefit the whole of Britain."
Local Government Pension Schemes and defined contribution pension funds in the UK are expected to collectively manage £1.3 trillion in assets by the end of this decade. However, individually, these funds lack the scale needed to finance major investments in infrastructure like roads, rail, and airports.
According to the government’s interim Pensions Investment Review report, pension funds are better equipped to invest in a broader array of assets when their assets under management reach the range of £25-£50 billion. Funds managing over £50 billion can benefit even more, including investing in large-scale projects directly at a lower cost.
The government plans to introduce a Pension Schemes Bill next year, which would facilitate pension fund consolidation and empower fund managers to more easily transition savers between schemes.
These "megafunds" are inspired by pension systems in Canada and Australia, where infrastructure investments are significantly higher than those managed by UK defined contribution schemes. "Canada and Australia have some of the world’s best pension funds," Reeves told the BBC. "In Britain, our funds are often too small to yield good returns for retirees and to support economic growth."
The funds will be regulated by the Financial Conduct Authority and will undergo rigorous oversight to ensure they deliver value for savers and make sound investment decisions.
However, Tom Frost, head of UK institutional clients at abrdn, cautioned against excessive consolidation. While the public largely supports using pension savings to invest in UK businesses, housing, and infrastructure, Frost warned that reducing the number of schemes too drastically could stifle innovation and competition, potentially leading to poorer outcomes for current and future retirees. Photo by robertsharp, Wikimedia commons.