UK Chancellor Plans Britain’s Biggest Pension Reforms in Decades

Chancellor of the Exchequer Rachel Reeves proposed the consolidation of more than 80 local government defined contribution funds into pension ‘mega-funds’ in pursuit of Canadian- and Australian-style pension investing.

Source: HM Treasury

U.K. Chancellor of the Exchequer Rachel Reeves has major reforms planned for the country’s public pension system, with the aim of consolidating local government pension funds into larger “mega-funds,” and consolidating the country’s multi-employer defined contribution plans.

Reeves’ proposal, touted as the biggest pension reform in decades, would consolidate 86 local English and Welsh government pension funds that are part of the Local Government Pension Scheme into a far smaller number of funds. LGPS funds would manage 500 million pounds ($633 billion) in assets by 2030.

The LGPS, founded in 2015, is a pension pool of more than 80 defined benefit plans. Each fund, however, is individually administered by local municipalities. The proposal would consolidate pension management into a handful of funds.

These 86 plans range in size between 300 million pounds and 30 billion pounds, with 6.7 million members and beneficiaries across them.

Want the latest institutional investment industry news and insights? Sign up for CIO newsletters. 

The Treasury has also proposed setting a minimum size requirement for defined contribution schemes. The roughly 60 multi-employer DC plans in the U.K. are estimated to manage more than 800 billion pounds by the end of the decade. Under the proposal, the government would facilitate the consolidation of these plans into mega-funds.

The reforms will be introduced in a new Pension Schemes Bill sometime next year, according to a news release.

Earlier this year, Reeves met with pension executives from the Maple 8, the largest public pension funds in Canada, renowned for their style of investing, which prioritizes internal management of assets and direct investments. Reeves aims to replicate this model in the U.K and also wants to take influence from Australia’s superannuation system.

Consolidation of assets could make it easier for the countries’ pension systems to invest in a wider range of assets, such as infrastructure projects. The Treasury estimated that consolidation of assets could unlock 80 billion pounds for infrastructure projects and “exciting new businesses.”

“Even larger pensions funds of greater than £50 billion in assets can harness further benefits including the ability to invest directly in large scale projects such as infrastructure at lower cost,” Pensions Minister Emma Reynolds said in a statement.

The Canadians, indeed, are major infrastructure investors. Caisse de dépôt et placement du Québec, the public pension fund of Québec allocates 14% of its portfolio, or CAD 59.8 billion ($42.68 billion) to infrastructure. PSP Investments has a 13% allocation, totaling CAD 34.5 billion, to the asset class.

“This is supported by evidence from Canada and Australia. Canada’s pension schemes invest around four times more in infrastructure, while Australia pension schemes invest around three times more in infrastructure and 10 times more in private equity, such as businesses, compared to Defined Contribution schemes in the UK,” Reynolds said.

Today, PSP Investments announced that it would acquire three airports in the U.K.

Among Reeves’ other plans are creating a sovereign wealth fund to invest billions of pounds in domestic infrastructure and energy transition investments.