Reeves to force UK council pensions to consolidate into eight ‘megafunds’

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UK chancellor Rachel Reeves is to legislate to develop eight pension “megafunds” as part of reforms to Britain’s fragmented local government retirement scheme that she claims could unlock £80bn of investment.

But the chancellor has rejected more radical options including forcing pension funds to invest in British assets, or creating one single Canadian-style fund out of the UK’s sprawling £391bn local government pension scheme.

Reeves told the Financial Times that the development of eight pools worth an average £50bn by 2030 would end the role of local councils in administering the money and boost “fast-growing British businesses and infrastructure”.

“Everything will go through the pools rather than through local authorities,” she said in an interview before Thursday’s Mansion House speech in the City of London. “This will deliver the megafunds that have eluded the UK for too long.”

Local authority pension funds already consolidate some of their assets across eight pools, but less than half of their assets are managed this way, according to a government consultation published last year.

The assets managed by the pools, which supervise investments on behalf of the councils, range from around £25bn to £65bn.

Reeves said she was also targeting a minimum size for multiemployer defined contribution pension schemes of £25bn to £50bn, which she called a “massive change”. 

The government will consult on setting a minimum size requirement for these funds and on measures to “facilitate their consolidation into megafunds”.

Around 26mn people in the UK have their workplace pensions invested through “master trusts”, which are used by employers to manage the retirement schemes they offer to their staff.

Currently only three master trusts manage assets of more than £25bn, according to a ranking of multiemployer defined contribution schemes by consultancy Go Pensions. There are 34 in total.

Other funds affected by Reeves’ proposals are called “contract-based” schemes, where workers have a direct contract with the pensions provider.

The Treasury said consolidating defined contribution schemes was to ensure they “deliver on their investment potential” and it would consult on legislation to help people move out of poorly performing funds. 

Reeves will use her Mansion House speech to try to reassure sceptical City grandees that she has a plan for growth after last month’s £40bn tax-raising Budget, new labour laws and the latest increase in the minimum wage.

Apart from pensions reforms, Reeves will on Thursday send “remit” letters to City regulators urging them to focus more on growth, as part of a wider effort by the government to remove obstacles to business. 

She also told the FT she wanted to reassure business her recent tax rises were part of a “once in a parliament Budget”. However she did not exclude having to raise taxes if global circumstances changed.

Last week Reeves told MPs she was “not going to be coming back with more tax increases”.

Reeves said she would legislate next year to enact “some of the biggest reforms to pensions in a generation”, but she wants to consolidate the sector into more efficient funds rather than force them to invest in the UK.

“I think that would be the wrong approach,” she said, during a visit to a rapidly expanding west London biotech company. “I want to work with business. 

“I’m confident that what we are putting forward can unlock £80bn of investment,” she added, while saying it was up to individual investors whether they put this money into UK companies or infrastructure.

Reeves said the figure was based on the best performing funds in Canada and Australia, which are able to use their scale to allocate a higher proportion of assets to infrastructure and private markets.

Reeves said an interim government pensions review concluded that funds start to make more productive investments once they manage between £25bn and £50bn. 

“We aren’t going to be mandating where the money is,” she added. “But investors in the US are getting returns from businesses headquartered here in London.” She wants British investors to have the same opportunities.  

The Treasury said the “megafunds” would have to be authorised by the Financial Conduct Authority, which is currently the case for only five of the eight pools, to ensure they met the highest standards and offered better value. 

Jeremy Hunt, the former Conservative chancellor, has privately urged Reeves to build on the pension reforms he set out in his own Mansion House speech last year.

The current chancellor said that legislation, in the form of a pension schemes bill, is key.

“In the first year of a Labour government we want to bring forward these reforms through legislation,” Reeves said.

The chancellor wants some of the council pension pots to be spent on local projects, suggesting a potential 5 per cent target.