Chancellor Rachel Reeves has announced “radical” new pension investment plans in what she calls the “biggest” reform in decades.
The Government plans to consolidate the UK’s 86 council pension schemes into a small number of “pension megafunds”.
It is claimed that the move would unlock £80billion worth of investment in new UK businesses, infrastructure and local projects.
These megafunds are said to mirror set-ups in Australia and Canada, where pension funds take advantage of size to invest in assets that have higher growth potential.
However, industry experts have described the reforms as “a high risk, low return investment opportunity”.
Responding to the plans, Daniel Wiltshire, actuary and independent financial advisor (IFA) at Wiltshire Wealth commented: “The Chancellor sees this a potential cheap source of funding for her pet projects, but it’s not clear that this will benefit public sector workers. The UK has a dreadful record at delivering large infrastructure projects on time and on budget. It strikes me as a high risk, low return investment opportunity.”
Hamish Anderson, co-founder and chief executive officer at Money Mover said: “Pooling assets makes sense in terms of management and cost efficiencies, as anyone who’s tried to manage pensions from numerous previous employers will agree.
“It’s also a step towards creating a sovereign wealth fund that has provided so well for the people of Norway but has been notably lacking from the UK’s financial resources.”
However, Mr Anderson pointed out: “What it isn’t is a viable alternative to a coherent Government plan to invest in the renewal and creation of the country’s infrastructure.”
Riz Malik, IFA at R3 Wealth suggested that the real motivation may lie in the greater control that larger, consolidated megafunds would provide.
He said: “Rachel ‘Regulate’ Reeves is continuing the work of the Conservatives and is now looking at council pension funds to reignite the economy and prop up a disastrous Budget for UK businesses. Mega funds can be controlled more easily, which may be the real reason behind the desire to consolidate.”
Simon Bridgland, director at Release Freedom acknowledged that while the concept of pooling pension pots is “good in principle,” and entrusting them to fund managers could encourage a more commercially minded approach than that of local government officials, there are concerns.
He worries that if fund managers are restricted primarily to UK Government infrastructure investments – which are notorious for overspending, delays, and the impact of political shifts – this could lead to further issues with pension stability.
Mr Bridgland added: “Can the Government afford to have defined benefit schemes exposed to similar risks and costs as defined contribution schemes? Who will pay to further top up funds when things go south?”
Currently, UK pension assets, including the Local Government Pension Scheme and Defined Contribution plans, are projected to reach £1.3trillion by 2030. However, the Government has said their “fragmented” structure limits opportunities for large-scale, productive investments.
An interim report from the Pensions Investment Review, released yesterday, highlights that pension funds managing between £25-50billion begin to see significantly higher returns and can access a broader range of investment opportunities.
Funds exceeding £50billion can directly invest in major projects at lower costs, a model which the Government claims is successfully demonstrated by larger Canadian and Australian pension schemes, which allocate substantially more to infrastructure and private equity compared to the UK.
The Government has reassured that these megafunds will need to meet “rigorous standards” to ensure they deliver for savers, such as needing to be authorised by the Financial Conduct Authority.
Governance of the Local Government Pension Scheme will also be “overhauled” to deliver better value from investment decisions, which independent research suggests could free up money in the long-term to support local public services.
Defined contribution pension schemes are set to manage £800billion worth of assets by the end of the decade.
With around 60 different multi-employer schemes ar present, each investing savers’ money into one or more funds, the Government said it will consult on setting a minimum size requirement for these funds to “ensure they deliver on their investment potential”.
Ms Reeves said: “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.
“That starts with the biggest set of reforms to the pensions market in decades to unlock tens of billions of pounds of investment in business and infrastructure, boost people’s savings in retirement and drive economic growth so we can make every part of Britain better off.”
Pensions Minister, Emma Reynolds said: “Harnessing the power of this multi-billion-pound industry is a win-win, benefiting future pensioners, and our wider economy.
“These reforms could unlock £80billion of investment into exciting new businesses and critical infrastructure.”
