Britain to build pension ‘megafunds’ to boost economy

According to government analysis which will be published in the interim report of the Pensions Investment Review, pension funds are better placed to invest in a wider range of assets once their AUM reach £25-50 billion

Britain wants to build a slew of "megafunds" with up to £80 billion in fresh investment firepower, under plans for the biggest shake-up in UK pensions seen in decades, finance minister Rachel Reeves said on Wednesday.

Reeves is under pressure to address massive under-investment by UK pension funds in domestic assets, with a recent collapse in allocations cited among the reasons for the country's lacklustre economic growth.

Speaking on the eve of her first Mansion House address to the UK financial industry, Reeves said she would consolidate around 60 DC pension schemes and 86 Local Government Pension Schemes, to make them more cost-efficient and large enough to bankroll ambitious projects.

Last month's budget fixed the foundations to restore economic stability and put our public services on a firmer footing. Now we are going for growth, she said in a statement.

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, she added.

LGPS and DC pension pots in the UK are expected to collectively manage £1.3 trillion in assets by the end of the decade, but many funds lack scale individually to pursue big-ticket investments such as roads, rail and airports.

As per government analysis which will be published in the interim report of the Pensions Investment Review, pension funds are better placed to invest in a wider range of assets once their assets under management (AUM) reach £25-50 billion.

Funds holding more than £50 billion in assets can harness even greater benefits, the analysis added, including investing directly in large scale projects at lower cost.

The government said it would consult on measures to facilitate pension fund consolidation via a new Pension Schemes Bill next year, which would also seek to empower fund managers to more easily move savers between schemes.

These so-called "megafunds" resemble pension schemes in place in Canada and Australia, where infrastructure investment volumes are respectively four times and three times greater than those managed by UK DC schemes.

They (Canada and Australia) probably have the best pension funds anywhere in the world, Reeves told the BBC. Our pension funds in Britain are too small to be making the investments that get a good return for people saving for retirement and to help our economy to grow.

The government said the funds would be authorised by the FCA and subject to heavy scrutiny to ensure performance for savers, including delivering value for money in investment decisions.