So after much speculation, the government has revealed its big idea is to create pension megafunds in the hope that this will unlock billions of pounds of investment in new businesses and infrastructure projects.
This initiative, announced on Thursday night by Rachel Reeves in her first Mansion House speech as chancellor, will be introduced through a new Pension Schemes Bill next year and create megafunds by consolidating defined contribution (DC) schemes and pooling assets from the 86 separate Local Government Pension Scheme (LGPS) authorities.
These megafunds mirror set-ups in Australia and Canada, arrangements where Reeves has enthused about, because they typically take advantage of their size and scale to invest in assets that have higher growth potential.
As a result, the government has summoned up a magical number of unlocking £80bn of investment that could be delivered in UK new businesses and critical infrastructure while also boosting DC pension pots, thanks to the megafunds.
The rationale for this is partly revealed in the government’s analysis – published on Thursday in the interim report of the Pensions Investment Review at Mansion House.
It shows that pension funds begin to return much greater productive investment levels once the size of assets they manage reaches between £25bn to £50bn. At this point they are better placed to invest in a wider range of assets, such as new businesses and infrastructure projects, noted the report.
Even larger pensions funds of greater than £50bn in assets can harness “further benefits” including the ability to invest directly in large-scale projects such as infrastructure at a lower cost.
The report cites evidence from two of its favourite national pension systems – Canada and Australia – to support this case.
Canada’s pension schemes invest around four times more in infrastructure, while Australian pension schemes invest around three times more in the asset class and 10 times more in private equity, compared to DC schemes in the UK.
“One of the key reasons for this is the much larger size of their funds while our pensions landscape remains highly fragmented,” said Reeves, explaining the difference in investment between Canada/Australia and the UK.
Benchmarking against domestic and international examples, the report declares how consolidation of the LGPS and DC schemes into megafunds could unlock around £80bn of investment in productive investments.
The government is therefore consulting on proposals to take advantage of the pension fund size.
Looking at the numbers in detail, the LGPS in England and Wales will manage assets worth around £500bn by 2030. These assets are split across 86 different administering authorities, managing assets worth between £300m and £30bn.
The government also said the governance of the LGPS will be overhauled to “deliver better value from investment decisions”.
The government said local economies will be boosted by the changes as each administering authority will be required to specify a target for the pool’s investment in their local economy, working in partnership with Local and Mayoral Combined Authorities to identify the best opportunities to support local growth.
If each authority were to set a 5% target, that would secure £20bn of investment in local communities.
A new independent review process will be established to ensure each of the 86 administering authorities “is fit for purpose”.
In an interesting line in her speech, Reeves said: “We will take a more proactive approach to working with investors to ensure that capital is directed to the UK’s biggest growth opportunities.”
What this “proactive approach” means in reality for investors remains to be seen.
Reeves did say that the government was creating the National Infrastructure and Service Transformation Authority (NISTA), which will be operational by Spring 2025, to lead on the planning of infrastructure projects.
“We will publish a 10-year infrastructure strategy to ensure that there is a pipeline of projects to attract that investment,” Reeves said.
When it comes to DC pension schemes, these are set to manage £800bn worth of assets by the end of the decade. There are around 60 different multi-employer schemes, each investing savers’ money into one or more funds.
The government will therefore consult on setting a minimum-size requirement for these funds to ensure they deliver on their investment potential.
The government will also consult on measures to facilitate this consolidation into megafunds, including legislating to allow fund managers to more easily move savers from underperforming schemes to ones that deliver higher returns.
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