What will Rachel Reeves’s retirement scheme changes mean for pensions?

What is Reeves planning?

The chancellor plans to introduce a new pensions bill next year that will aim to pool assets from 86 separate local government pension schemes (LGPS) in England and Wales into eight “megafunds”, worth an average of £50bn each, by 2030.

Reeves is also planning to consolidate smaller defined contribution schemes across the UK from private businesses into pools of £25bn to £50bn.

There have long been questions over how to handle the UK’s fragmented pension landscape, including the assets of the LGPS, which together represent one of the world’s largest defined-benefit schemes with 6.5 million members and £360bn in assets.

What is the point of these ‘megafunds’?

The government is aiming to emulate the pension success stories of countries such as Australia, Canada and Norway, where public sector pension schemes have been consolidated into larger funds that are managed in-house by professional investors.

The idea is that bigger retirement funds can invest larger sums of money into a wider range of riskier and long-term assets such as infrastructure, startups and direct stakes in private businesses, known as private equity. While the government has not mandated where the pooled retirement money would go, the hope is a large portion would naturally flow into the UK’s own growing businesses and infrastructure projects.

Pooling assets would help cut costs, slashing the fees paid to teams of lawyers, banks, advisers, asset managers and actuaries deployed to help individual funds each year.

Many point to success stories in Canada, where a handful of schemes, known as the Maple 8, collectively manage around $2tn (£1.1tn) in taxpayer-backed pension schemes for the likes of teachers, municipal employees and healthcare workers. The Maple 8, created after a series of reforms meant to address underfunding in the 1990s, have become well known for investing in infrastructure schemes across the globe, including in the UK.

What do these overseas ‘megafunds’ invest in?

Foreign “megafunds” such as the Ontario Teachers’ Pension Plan and British Columbia Investment Management Corporation have invested in portions of the UK’s gas network, while others have taken stakes in UK ports, offices, shopping centres and other utilities.

Overnight, the news broke that PSP Investments – which manages the retirement funds for the Canadian armed forces and Royal Canadian Mounted Police – had bought the operator of Aberdeen, Glasgow and Southampton airports from Ferrovial and Macquarie in a £1.5bn deal.

Most Canadian funds have achieved higher average annual returns. Over the past 10 years, the Maple 8 have secured returns of between 7.3% and 9.3%, compared with 7% for the LGPS, according to figures compiled by the consultancy Hymans Robertson.

Part of that is owing to the fact that Canadian companies have taken larger private equity stakes, which have outperformed other types of investments such as government debt and listed shares over that period.

But critics say that those kinds of investments also come with risks. Earlier this year, the Ontario Municipal Employees Retirement Scheme, known as OMERS, was forced to slash the value of its 31.7% stake in the parent company of the troubled utility Thames Water down to zero.

I’m having deja-vu. Is this plan new?

No. Reeves – who hinted at this plan when she met pension bosses in Toronto this summer – is in effect rehashing similar plans by previous governments.

One of the most serious attempts came nearly a decade ago in 2015, when the then prime minister, David Cameron, pushed local government pension scheme funds into larger pools, with the intention of cutting investment costs and allowing for collective investment in assets such as infrastructure.

But Cameron’s changes failed to set a deadline for consolidation – which has so far only resulted in around 39% of LGPS assets being pooled into larger funds – and the process came under fire for adding further costs for individual schemes.

The last Conservative chancellor, Jeremy Hunt, tried to resurrect those plans last autumn, when he said that all local government pension fund assets would be invested in vehicles worth £200bn or more by 2040, leading many to speculate he wanted to cut groupings down into two or three pools. Those plans were paused by this year’s general election.

What challenges could Reeves face?

There is the risk that Reeves could face bureaucratic battles with local councillors, including those from her own party, who do not want to give up control of how their pension money is invested.

The Pensions and Lifetime Savings Association has cautioned about the potential tax and legal costs that could be involved in transferring the assets into larger pools, which is an issue that ended up hindering the consolidation process launched under Cameron.

There could also be pushback from the reams of lawyers, asset managers, banks and actuaries who could lose out on hundreds of millions of pounds in annual fees and contracts if funds are consolidated.

And proponents of a more fractured model argue it will affect the diversity of investment by UK funds.