Pension 'megafunds' explained as Chancellor unveils new scheme

Rachel Reeves has unveiled proposals to establish pension 'megafunds' as part of a major overhaul that could impact your future savings. Speaking at Mansion House, the Chancellor outlined plans to merge nearly 90 smaller local authority and private workplace pensions into larger funds, with the aim of generating higher returns.

She pointed out that similar schemes in Australia and Canada have been successful, stating: "Australian pension schemes invest around three times more in infrastructure investment compared to defined contribution schemes in the UK and 10 times more in private equity – including in high-growth businesses – compared to the UK. One of the key reasons for this is the much larger size of their funds."

Reeves emphasised the need to ensure that British savers can enjoy the benefits of investments in domestic assets, rather than overseas investors: "While our pensions landscape remains highly fragmented, that means many of our pension funds do not have the capacity to invest at the scale required. And more often than not, it is Canadian teachers and Australian professors reaping the rewards of investing in British productive assets through their pension schemes, rather than British savers. That's not good enough, and we need to change that."

The government is set to run a consultation on these reforms before introducing them in a new Pension Schemes Bill next year. The government's new plans may affect individuals enrolled in defined contribution (DC) pension schemes, the most prevalent form of workplace pension. In a DC scheme, employees contribute a regular sum to their pension, with the final value contingent on the amount saved and investment growth by retirement, reports the Mirror.

Authorities are considering setting minimum fund thresholds, speculated to be between £25 billion and £50 billion. Moreover, there's ongoing consultation about granting fund managers the authority to transfer individuals out of underperforming schemes.

In contrast, those in defined benefit (DB) pension schemes, which provide a lifetime income based on salary and employment tenure, will remain unaffected.

Commenting on the proposals, Tom Selby, director of public policy at AJ Bell, acknowledged their potential but highlighted the necessity for ensuring they yield optimal returns for retirees' savings. He stated: "The government's hope will be that by moving from having 86 local government schemes down to a single one, or a few, will benefit from economies of scale."

The expert voiced significant concerns about pension investments, stating: "My overarching concern is that the needs of the saver, whose money is ultimately going to be risked, will be forgotten about. There's a reason that an occupational scheme has a trustee to look after the interests of members. Part of that is investing their money to maximise returns and get the best retirement outcomes possible."

He further cautioned against merging investment goals with retirement planning: "Conflating a government goal of driving investment in the UK and people's retirement outcomes brings a danger because the risks are all taken with members' money. If it goes well, everyone can celebrate. But it's clearly possible that it will go the other way, so there needs to be some caution in this push to use other people's money to drive economic growth."

The proposed reforms suggest a major consolidation of Defined Contribution (DC) pension schemes, which would lead local government pension scheme authorities to pool assets. By 2030, the Local Government Pension Scheme in England and Wales is expected to manage £500 billion, with DC pension schemes projected to oversee around £800 billion by the end of the decade.