The Chancellor Rachel Reeves will unveil plans to consolidate the UK’s sprawling £400bn local authority pension schemes tomorrow in a bid to unlock a wave of investment into the UK.
In her first Mansion House speech in the City, Reeves is expected to announce a new Pension Schemes Bill to be introduced next year, aiming to unlock £80bn of new investment into business and infrastructure.
Currently, the 86 different local government pension schemes manage assets between £300m and £30bn, with local government officials and councillors managing each fund.
“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,” said Reeves.
Government analysis as part of a review of pensions, revealed that pension funds begin to return “much greater productive investment levels” once the size of assets they manage reached between £25 to 50bn.
Reeves did not float mandating pension schemes to invest in UK stocks and infrastructure projects, instead encouraging specified targets for each pool’s investment in the local economy.
Jon Greer, head of retirement policy at Quilter, said the move was “a significant step towards enhancing the efficiency and investment potential” of local pension funds.
“By pooling resources into larger funds, the UK can access high-yield investments that smaller schemes often miss,” he added.
The plan draws inspiration from successful models in Australia and Canada, such as the Ontario Teachers’ Pension Plan, which has managed to pool resources to invest in assets like the ownership of Bristol Airport.
Canada’s pension schemes invest around four times more in infrastructure, while Australia pension schemes invest around three times more in infrastructure and 10 times more in private equity than the UK.
“In other countries scale has been used to drive better outcomes for savers and boost investment and we welcome the focus on how similar changes could be applied here in the UK,” said Standard Life CEO Andy Curran.
“Today’s announcement also signals the ongoing importance of introducing a pension value for money framework to ensure savers can assess whether their hard earned savings are delivering for them.”
Reeves also announced that the government was proposing to set a minimum size for multi-employer defined contribution, pushing them to create “megafunds”.
Currently, there are around 60 different multi-employer schemes, each investing savers’ money into one or more funds.
“A minimum size threshold for Defined Contribution pension schemes will be a welcome move that allows UK pension savers to enjoy the benefits of scale needed to support better governance, investment expertise and the diversification of their portfolios,” said BVCA chief executive Michael Moore.
However, the push to funnel retirement cash into riskier assets drew concern from pensions and retail investment firm, AJ Bell.
“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,” said Tom Selby, director of public policy at AJ Bell.
“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.