Reforms set to be introduced through a Pension Schemes Bill mean that all multi-employer defined contribution schemes and local Government pension scheme pools will operate at this megafund size by 2030, with those that cannot but are worth over £10bn forced to demonstrate a clear plan to reach the level by 2035.
The changes were announced in the Pensions Investment Review report. The funds will be instructed to invest a proportion of their funds locally, with legislation pushed through to enforce this if necessary – though Reeves said she does not expect to need legislation, as many funds have already signed voluntary agreements.
“These reforms mean better returns for workers and billions more invested in clean energy and high-growth businesses,” Reeves added.
But critics say the legislation creates a ‘Sword of Damocles’ above the heads of pension schemes, which will feel forced to invest locally.
Tom Selby, director of public policy at pensions and DIY investment group AJ Bell, said: “In reality, this essentially puts a gun to schemes’ heads and will create those mandatory targets in all but name.”
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He added that the claims that these reforms will benefit savers need to be taken “with a fistful of salt”.
“It is vital the needs of pension scheme members remain the priority, rather than the needs of a Government focused primarily on its growth agenda and ultimately to bolster its chances of re-election,” he said.
However, the Investment Association, which represents UK investment companies, said the move represented a “new era” for the pension system and the chance to “embed world-class investment practice to the benefit of millions of savers and the wider economy”.
It added: “With the greater resources available to larger pension schemes, investment expertise and governance can be strengthened to achieve sophisticated scale.
“This will give pension savers access to a wide range of asset classes and strategies that can both improve member outcomes and contribute to better capital allocation, including for the UK economy.”
Megafunds ‘will deliver better retirement’
Pensions minister Torsten Bell said the reforms will “mean bigger, better pension schemes, delivering a better retirement for millions and high investment in Britain”.
He claimed that the consolidation alone would deliver a £6,000 boost to an average pension pot, with costs saved through consolidation and better governance.
He added that the move secures over £50bn investment in UK infrastructure, new homes and fast-growing businesses, as these bigger funds invest into the British economy.
However, Selby said there’s a danger that retirees’ savings will be risked in pursuit of higher investment into the UK, adding that private equity and infrastructure investment is “notoriously high cost and high risk”.
More flexibility for schemes
The Government also said defined contribution schemes will be given more freedom through legislation to move savers into better-performing funds, enabling bulk transfer of assets into the megafunds.
