Chancellor Rachel Reeves has unveiled plans for what she calls the "biggest pension reform in decades" in an attempt to unlock investment into areas such as infrastructure and tech start-ups, and boost UK growth.
Reeves used her first Mansion House speech to announce her radical reforms, which involve merging 86 council pension schemes and consolidating small workplace pensions into a handful of "pension megafunds."
The government hopes the pension changes will unlock around £80 billion of investment for infrastructure projects and new businesses.
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The consolidation of local government pension schemes is also expected to “free up money for local public services in the long term and secure more than £20 billion for investment in local communities”, according to the Treasury.
The chancellor wants the UK's pension schemes to be more like Canada and Australia. In those countries, local government pensions are pooled into a handful of funds that are able to make big investments around the world.
Reeves said: "For too long, pensions capital has not been used to support the development of British start-ups, scale-ups or to meet our infrastructure needs.
"I have long been of the view that this hurts our economy because our highest-potential businesses cannot expand and savers are not seeing the returns on their investment which they deserve."
Jonathan Moyes, head of investment research at Wealth Club, said the Labour government’s start has been counter-intuitive following a “substantial tax and spend Budget,” but said the Mansion House speech shows the chancellor’s vision.
“Reforming the nation’s pension schemes represents a substantial opportunity for the country,” he says.
“By taking a leaf out of the Canadian pension book, Reeves’ may just provide the spark the UK economy needs to crowd in investment into key infrastructure projects, the energy transition and scale up enterprises.”
The proposals follow on from a Pensions Scheme Bill announced in the King’s Speech in July.
Reeves and pensions minister Emma Reynolds have been busy working on a series of reforms since Labour came into power.
These include scrapping the Winter Fuel Payment for millions of pensioners, applying inheritance tax to pensions and, now, reforming workplace pension schemes.
Reynolds added: “Harnessing the power of this multi-billion-pound industry is a win-win, benefiting future pensioners, and our wider economy.”
What has the government announced?
The government wants to create pension megafunds. Local government pension schemes will be tipped into these, as well as smaller defined contribution schemes.
Reeves said the government will legislate on measures to consolidate the Local Government Pension Scheme.
It will require that the 86 Local Government Pension Scheme administering authorities consolidate all their assets into eight pools.
According to the Treasury, there are currently around 60 different multi-employer schemes, each investing savers’ money into one or more funds. The government will consult on setting a minimum size requirement for these funds.
Reeves believes megafunds in the UK could “deliver around £80 billion of investment in exciting new businesses and critical infrastructure while boosting defined contribution savers’ pension pots”.
The government says its analysis shows that pension funds “begin to return much greater productive investment levels once the size of assets they manage reaches between £25-50 billion.
"Even larger pension funds of greater than £50 billion in assets can harness further benefits including the ability to invest directly in large scale projects such as infrastructure at lower cost”.
How will it affect pension savers?
On the fact of it, boosting pension savers’ nest eggs as well as the economy seems like a win-win.
Labour has previously said that its Pensions Bill could “boost pension pots by over £11,000, with further consolidation and broader investment strategies to potentially deliver higher returns for pensions”.
But is it as simple as that?
Experts have broadly welcomed the idea of making the pensions industry more efficient, and using megafunds to benefit from economies of scale and high-yield investments – but some have warned that the plans could put savers’ money at risk.
Tom Selby, director of public policy at the investment platform AJ Bell, comments: “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. 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.”
Tom McPhail, director of public affairs at The Lang Cat, a consultancy, says that consolidation is a great idea in theory, but urges caution around pension schemes investing in specific assets.
He notes: “While investment in UK infrastructure is welcome, surely where these schemes invest is down to the trustees and they may have other ideas on what will deliver the best returns for their members.”
Jason Hollands, managing director at wealth management firm Evelyn Partners, says merging local authority pension schemes “seems workable”, but that it will be challenging to change workplace pensions in the private sector.
He explains: “Public sector defined benefit schemes are a lot easier to merge and regulate than private sector firms that provide defined contribution pensions to employers and where investment choice and performance has a direct impact on retirement outcomes.
“The challenge will be the attempt to merge these defined contribution schemes in the private sector, where it is estimated £800 billion worth of assets will be managed by the end of the decade.”
One element missing from the speech was a previous policy proposal to direct pension scheme money specifically into UK companies.
James Carter, head of platform product policy at Fidelity International, backed this move but said there are other ways that firms could be better supported in the UK such as “removing or reducing the burden of stamp duty for equity transactions,” which he said would put the country “on a level footing with other markets.”
Is my pension scheme going to change?
If you’re a member of a local government scheme, your pension is based on salary and service length – known as a defined benefit pension. So, the pension you receive in retirement is paid regardless of what the scheme invests in and how those investments perform.
Workers in local government schemes will not see any change to their payments as a result of Reeves’s plans, according to the BBC.
If the megafund plan goes ahead, there could be some change in the company that oversees the pension scheme, and therefore how the scheme is administered.
This is also the case if you’re in a defined contribution workplace scheme. If your pension scheme gets consolidated into a megafund, there will be a different company overseeing your retirement savings.
There could also be a change to the default fund – where pension savers’ money goes if they don’t actively choose where to invest – and the wider investment fund range.
It will be important to keep an eye on any changes like this, so you are comfortable with how your pension pot is invested. If the investment returns fall, the money you receive in retirement will also fall.
Any changes will not happen overnight though. There will be several consultations, with the final report published in the spring.
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