Chancellor Rachel Reeves said the plan could unlock £80bn of investment and drive economic growth.
The Chancellor will use her first Mansion House speech tonight (14 November) to talk about the plans, which she said will “tackle the fragmented pensions landscape, deliver investment and drive economic growth – which is the only way to make people better off.”
Council pension schemes
The reforms will be introduced through a new Pension Schemes Bill next year. They will create megafunds through consolidating defined contribution schemes and pooling assets from the 86 separate Local Government Pension Scheme authorities.
Workers in local Government schemes have what’s known as a defined benefit pension – a pension based on salary and service length. These workers will not see any change to their payments as a result of the plans.
These megafunds mirror set-ups in Australia and Canada, where pension funds take advantage of size to invest in assets that have higher growth potential.
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Emma Reynolds, pensions minister, said: “Harnessing the power of this multi-billion-pound industry is a win-win, benefitting future pensioners, and our wider economy. These reforms could unlock £80bn of investment into exciting new businesses and critical infrastructure.”
Private pension schemes
In contrast, most private sector workers are in schemes where they pay into a savings pot each month, and their eventual pension depends upon the size of this pot when they retire.
Separately, the Government also wants to set a minimum size limit on defined contribution schemes in the private sector, which manage around £800bn of investments, to encourage the consolidation of the around 60 different multi-employer schemes.
What do the experts say?
Reacting to the news, experts warned that the interests of savers may be left behind in the plans.
Tom Selby, director of public policy at AJ Bell, said: “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.
“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.
“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.”
Regarding plans for a consultation to establish a minimum size requirement for multi-employer defined contribution funds, James Carter, head of platform product policy at Fidelity International, said: “We believe pension scheme members’ assets should be invested through schemes that are structured to provide value for money, and lead to the best outcomes possible with a focus on net of cost investment returns.
“Creating a scale of assets to facilitate broader investment opportunities (e.g., private assets) can be achieved by ‘collecting’ individual schemes on provider platforms and through common investment strategies designed and deployed by providers.
“Consolidation of schemes is also important, and we welcome the measures announced, which will help to address DC schemes [that] are not structured to deliver better outcomes for members.”
