UK Chancellor Rachel Reeves is proposing significant pension reforms aimed at transforming the country’s public sector pension funds by consolidating them into larger “megafunds” modeled after successful systems in Canada and Australia.
Currently, the UK has 86 local government pension funds managing £354 billion in investments, which Reeves argues are too small to generate optimal returns. The proposed reforms would merge these funds into a few larger investment pools, similar to the pension systems in Canada and Australia, which she describes as “the best pension funds anywhere in the world.”
The government’s plan involves two key strategies:
1. Merging the 86 council pension funds, which represent 6.5 million pensions, into larger funds managed by professional fund managers.
2. Setting minimum size limits on defined contribution schemes, which currently manage around £800 billion across approximately 60 multi-employer schemes.
These megafunds would be required to specify investment targets for their local economies. The government claims these changes could potentially “unlock” £80 billion in investments across areas like energy infrastructure, technology start-ups, and public services.
Reeves emphasized that the current system is inefficient, noting it’s paradoxical that Canadian teachers and Australian professors are more likely to invest in long-term UK assets than British savers themselves.
However, the proposal has drawn criticism from financial experts who warn of potential risks. Tom Selby from AJ Bell cautioned that conflating government economic goals with retirement outcomes could jeopardize members’ investments. He argued that the current system prioritizes maximizing retirement income, which sometimes means investing in international markets rather than focusing solely on UK investments.
Critics also highlighted potential challenges with larger funds. For instance, while bigger funds can offer greater rewards, they can also introduce more significant risks. The Ontario Municipal Employees Retirement System, a large Canadian pension fund, was cited as an example, noting its substantial investment in the financially troubled Thames Water.
Jon Greer from Quilter raised concerns about the availability of substantial, reliable investment projects in the UK. He warned that if there are insufficient viable investments, funds might be compelled to pursue riskier alternatives.
The Shadow Chancellor, Mel Stride, indicated that the Conservative opposition would carefully scrutinize the details of the proposed reforms, particularly regarding mandated investment locations.
Despite the criticisms, Reeves remains committed to the reforms, arguing that they are necessary to improve pension fund performance and support UK economic growth. She acknowledged potential criticism of recent tax increases but maintained that such measures are crucial for stabilizing public finances and funding essential public services.
The proposed pension reforms represent what the government describes as the “biggest pension reforms in decades,” aiming to modernize the UK’s pension investment strategy and potentially stimulate domestic economic development.
