Reeves must go bigger and bolder on local pensions reform

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Who does not like a “megafund”? UK chancellor Rachel Reeves has joined a long list of British politicians who have eyed the potential of local authorities’ massive — but fragmented — retirement assets. These have a collective value of £392bn in England and Wales.

For years Reeves’ predecessors — starting with George Osborne in 2015 — have sought to tap these assets to fund British infrastructure and businesses, with limited results. The chancellor hopes to correct this by legislating for eight pension megafunds. This is weak sauce: she should be bolder if she really wants to replicate the might of overseas pension funds.

The confusingly named Local Government Pension Scheme is administered by 86 local pension funds in England and Wales. If properly combined, it would rank in the world’s top 10 largest pension funds.

Previous governments have pushed for funds to transfer their assets into eight “pools”, which can supervise investments on behalf of councils. But the last official figures — admittedly dating back to 2022 — showed that only 39 per cent of funds’ assets had been transferred. That is doubtless higher now. But it varies widely according to the pool. Reeves now wants all funds to delegate the management of all their assets to their chosen pool.

Why the UK has ended up with this messy halfway house is not straightforward. Some blame the government in 2015 for not being prescriptive about the desirable structure of a pool. Others point to “vested interests” — for which read local politicians, fund managers, pensions advisers — not wanting to cede control, or lose the fees they rake in from administering authorities. Some say the pools do not always offer what is needed.

Whichever it is, fragmentation is problematic, in terms of inefficiency, available expertise and higher costs. Reeves argues that Canadian and Australian megafunds are able to use their scale to invest in big infrastructure projects and other illiquid asset classes which (while riskier than liquid securities) should offer superior returns.

If the chancellor believes in the benefits of scale, it is not obvious why eight is the magic number. Consolidating all local government pension assets into one “mega-mega fund” might be too much in one go (but should ultimately be the aim). Evidence from abroad suggests economies of scale are only truly felt once a pool reaches at least $100bn (£78bn) of assets, says the Pension Insurance Corporation, a backer of consolidation.

The government’s own analysis says pension funds start to return “much greater productive investment levels” once they reach £25bn to £50bn but concedes funds of £50bn-plus “harness further benefits including the ability to invest directly in large scale projects . . . at lower cost”.

Without bolder action, Reeves’ pensions reforms risk turning into yet another half-measure.

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