After months of silence, the government has finally shown its hand on what its aims are for the world of pensions and investments.
One big move is the government’s plans for the pensions industry to operate at a much bigger scale – a message it has been presenting for some time – but we now have something closer to the substance of what this means.
It does mean all multi-employer Defined Contribution (DC) pension schemes and Local Government Pension Scheme (LGPS) pools will need to operate at a megafund-scale level of managing assets by 2030, based on measures to be introduced in the Pension Schemes Bill.
The government has used the oft-cited case of both Australia and Canada to promote its view that this greater size and scale, evident in these two countries, will enable pension funds to invest in big infrastructure projects and private businesses, which it hopes will boost the economy in the process and also potentially drive higher returns for the pension funds.
As part of this narrative, the government argues such changes will drive more investment directly into the UK economy for new homes and promising scale-up businesses.
The key point for multi-employer DC pension schemes is the requirement to operate at megafund level, managing £25bn or more in assets by 2030.
And as part of the changes the £392bn LGPS will see a consolidation in assets currently split over 86 administering authorities into just six pools. This process is already underway, with the Brunel Pension Partnership and Access pools told they must merge with another pool by September.
DC schemes will, said the government, be given “more freedom” through legislation to move investments into better performing funds, enabling bulk transfer of assets into the megafunds.
Schemes worth over £10bn that are unable to reach the minimum size requirement by the end of the decade will be allowed to continue operating, as long as they can demonstrate a clear plan to reach £25bn by 2035.
To provide additional certainty that individual schemes will not lose business by investing in private markets, which offer the potential for higher returns but are expensive to invest in upfront, the government will take a reserve power in the Pension Schemes Bill to set binding asset allocation targets.
In addition, the Pensions Investment Review has confirmed the March 2026 deadline for LGPS asset pooling, with a backstop power set to be taken in the Pension Schemes Bill to “protect the interests of LGPS members and local taxpayers” where necessary by directing an administering authority to participate in a specific investment pool.
In short, all of this gives the government potentially more power and control over the LGPS and DC pensions investment process.
In addition, local investment targets will be agreed with the LGPS for the first time, securing in the region of £27.5bn of investments for local priorities.
The government said the LGPS will work, where applicable, with regional mayors, Welsh Authorities and councils to back the projects that “matter the most”.
Over £50bn was secured through the recent voluntary commitment from pension funds in the Mansion House Accord to invest five per cent of assets in the UK and new local investment targets for LGPS authorities.
This will, in turn, said the government, tackle the gradual decline in domestic investment from UK pension funds, where around 20% of DC assets are currently invested compared to over 50% in 2012.
Figures from the final Pensions Investment Review published today also shows that these reforms will drive higher returns for savers, in part by cutting waste in the system.
By 2030 these schemes could be saving £1bn a year through economies of scale and improved investment strategies, suggest the government.
The measures therefore promise to be a win on all fronts, if the government’s messaging is to transfer into reality.
Chancellor of the exchequer, Rachel Reeves, said: “These reforms mean better returns for workers and billions more invested in clean energy and high-growth businesses.”
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