The U.K. retirement system will undergo its biggest reform in decades, with Chancellor of the Exchequer Rachel Reeves set to announce further mergers of local government pension schemes and the consolidation of defined contribution plans into “megafunds,” in a move that aims to unlock £80 billion ($103.3 billion) in investment.
Reeves will outline the changes — affecting retirement plans that are set to have about £1.3 trillion in total assets by 2030 — in her inaugural Mansion House speech Nov. 14, with the government also publishing its interim report for its retirement system review, announced in July. The aim is also for improved governance among retirement plans.
Government analysis shows that retirement plans are better placed to invest in a wider range of assets — such as startups and infrastructure — once their asset size reaches between £25 billion and £50 billion, a government briefing note said.
LGPS plans in England and Wales are set to have about £500 billion in assets by 2030, but the assets are currently split across 86 administering authorities, each with between £300 million and £30 billion. Local government officials and councilors manage each pension fund — although efforts have already been made to consolidate these pension funds into eight pools.
The government said consolidating these assets into just a “handful of megafunds run by professional fund managers will allow them to invest more in assets like infrastructure, supporting economic growth and local investment,” the note said. LGPS fund governance “will also be overhauled to deliver better value from investment decisions, which independent research suggests could free up money in the long-term to support local public services.”
Each administering authority will also need to specify a target for investment in its local economy — a 5% target by each would secure £20 billion of investment in local communities, the government said. The pools will work with authorities to identify the best opportunities.
To ensure each of the 86 England and Wales administering authorities is “fit for purpose,” a new independent review process will be established.
On the DC side, where plans are set to have £800 billion in assets by 2030, the U.K.’s more than 60 multiemployer arrangements are in the government’s sights.
The government will consult on setting a minimum size requirement for these plans “to ensure they deliver on their investment potential.”
It will consult on how to facilitate such consolidation into what it also labeled as “megafunds,” which will include rules to allow money managers to easily move participants in underperforming plans to higher-returning ones.
The government cited systems in Canada and Australia as evidence supporting the power of megafunds, noting that Canadian retirement plans invest around four times more in infrastructure than U.K. DC plans, while Australia’s superannuation funds invest about three times more in infrastructure and 10 times more in private equity. Efforts have already been made in the U.K. to open up private markets and illiquid investments to DC plans, under the Mansion House Compact, with some plans committing to invest up to 5% in private equity, for example.
The changes will be introduced via a new pension funds bill next year.
While the U.K. retirement industry largely welcomed the direction of the changes and purpose — and also expressed relief at the omission of rules to mandate investment in certain asset classes — there were also warnings over disruption.
“In the LGPS area, we agree there are rational reasons to pool assets to achieve economies of scale, but any potential incremental savings from further consolidation needs to be balanced against the significant costs and disruption consolidation of the existing eight pools would entail,” said Tess Page, partner and head of U.K. wealth strategy at Mercer, in emailed comments. “Given the previously stated focus on fueling U.K. growth, we are surprised not to hear more at this stage on potential incentives and ideas where pension funds could play a bigger role. That said, we are pleased to see that decision-making bodies will continue to be able to make investment decisions without mandating certain allocations.”
And Gregg McClymont, executive director-public affairs Europe at IFM Investors — an infrastructure specialist manager owned by Australian super funds — said: "It looks like the government are deadly serious about learning lessons from the success of the Australian DC system.”
Australian plans have “delivered the win-win of greater allocations to private asset classes in the service of strong long-term investment returns,” he said, adding that the key to success in the market “has been rapidly scaling systems, which make long-term investments in a range of asset classes, in line with the fiduciary duty of their trustees to scheme members.”
Earlier this year, the chancellor met with Canada’s Maple 8 pension funds.
