The government has announced that billions of pounds worth of investment will be unlocked through the creation of pension megafunds.
With a focus on investing in businesses, infrastructure, and local projects, the megafunds will be introduced through a new Pension Schemes Bill next year which takes inspiration from Australia and Canada. In those countries, pension funds take advantage of size to invest in assets that have potential for further growth.
Megafunds will see defined contribution schemes consolidated and assets pooled from all of the separate Local Government Pension Scheme authorities, as part of the Chancellor’s work to achieve government aims and tackle the fragmented landscape of pensions.
Chancellor Rachel Reeves said:
“Last month’s Budget fixed the foundations to restore economic stability and put our public services on a firmer footing. Now we’re going for growth.
“That starts with the biggest set of reforms to the pensions market in decades to unlock tens of billions of pounds of investment in business and infrastructure, boost people’s savings in retirement and drive economic growth so we can make every part of Britain better off.”
Currently, the UK has one of the largest pension systems in the world, with the Local Government Pension Scheme and Defined Contribution market expected to manage £1.3 trillion worth of assets by the end of the decade. Despite this, the landscape is fragmented and currently lacks the size that would be needed to invest in new infrastructure projects.
To tackle this, the government has published analysis that shows how pension funds begin to return greater productive investment levels once their asset size reaches £25-50 billion. This puts them in a better place to invest in a wide range of assets, with larger pensions harness further benefits such as the ability to directly invest in large scale projects at a lower cost.
Angela Rayner, Deputy Prime Minister and Secretary of State for Local Government, also commented:
“We’ve all seen the fantastic work carried out day in, day out, by our frontline workers and it’s about time their pension started working just as hard by driving investment in their communities.
“This is about harnessing the untapped potential of the pensions belonging to millions of people, and using it as a force for good in boosting our economy.”
By 2030, the Local Government Pension Scheme in England and Wales will manage around £500 billion worth of assets. Whilst these are currently split between 86 administering authorities, bringing them together would allow them to be invested in more assets such as infrastructure that boost economic growth and local investment.
Local economies are also to be given a boost by these changes, with each Administering Authority being required to specify a target for its investment in the local economy, with this being driven by collaboration with local and mayoral combined authorities.
Image credit: iStock
