Rachel Reeves plans to use £350bn council pension pot to boost UK economy

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Rachel Reeves will next week set out plans to use the £354bn local government pension scheme to boost the UK economy, in a Mansion House speech intended to reassure the City of London that she has a plan for economic growth.

The chancellor wants to speed up the consolidation of fragmented local authority funds — in theory the seventh-largest pension scheme in the world — and to have them funnel more money into local projects.

Treasury officials said Reeves would use her City speech on Thursday to address criticism that her tax-raising Budget last month did not say enough about growth or reform. “Those messages didn’t really land,” admitted one ally.

Pension reform will be at the heart of the set piece address to the annual dinner of business leaders and Reeves has made a review of the UK’s £2.4tn pension industry a cornerstone of government plans to boost the economy and lift investment in British assets. 

At the centre of the plans are expected reforms to the UK’s sprawling local government pension scheme. Its divided administration adds layers of costs and reduces scale for investing in core British infrastructure projects.

Reeves has ruled out merging the 86 separate local council pots in England and Wales into a single “super fund”, a move that would have created a behemoth equivalent in size to the Canada Pension Plan. But she wants to encourage consolidation moves.

Over the past decade the funds have been working to consolidate, but progress has been slow. About half of LGPS assets are now run across eight “pools”, each with varying degrees of control. 

Jim McMahon, local government minister, gave a flavour of Reeves’ approach this week when he said the government could lower the running costs of local government pension schemes and free up money for British infrastructure investment by building on reforms since 2015 “without the need to create a single super fund that has been talked about”.

In a speech at the London Stock Exchange, he said ministers would consult on strengthened asset pooling, review governance structures and encourage local investment, with regional mayors playing a key role in drawing up pipelines of investable projects.

Reeves’ approach echoes that of the new Lord Mayor of the City of London and builds on the Mansion House reforms set out by her Tory predecessor Jeremy Hunt. His reforms aimed to persuade pension funds to invest more in UK assets to boost growth and deliver better investor returns.

Hunt told the Financial Times: “I started the ball rolling with the Mansion House reforms and to her credit Rachel Reeves seems to want to go further.” Reeves’ allies admit privately that there is a cross-party approach to the subject.

Reeves met the bosses of big pension schemes in Toronto in August with an eye to creating a “Canadian-style” model in the UK with massive retirement funds investing in equities and infrastructure.

“I want British schemes to learn lessons from the Canadian model and fire up the UK economy, which would deliver better returns for savers and unlock billions of pounds of investment,” she said at the time.

Pension industry figures do not expect Reeves to go down the route of mandating pension funds to allocate a specific percentage of their investments to UK assets, such as equities or infrastructure.

“I really don’t think they will do that — there would be a massive row,” said one senior executive.

Reeves believes pension funds could get better returns for investors by putting more money into UK assets. But Treasury insiders said she would not threaten to remove tax subsidies from the sector if it did not increase UK investments.

A long-standing concern in the finance ministry has been that any instruction to pension funds to invest in infrastructure would suppress demand for gilts; Reeves’ Budget contained plans for an extra £28bn of annual borrowing.

The Treasury said Reeves was “focused on growth”. “Central to that are the next steps on pension reform which will be set out in her Mansion House speech. This will unlock more private investment to fuel the government’s growth mission,” it added.