Pension ‘Megafunds’ to Supercharge UK Economy in Major Reform Push

In an ambitious bid to overhaul the nation’s pension landscape, Chancellor Rachel Reeves has unveiled plans for what she’s calling the “biggest pension reform in decades.” The government aims to consolidate the UK's 86 council pension schemes into a smaller number of "pension megafunds," modeled after successful schemes in Australia and Canada. These large-scale funds are expected to drive billions of pounds into vital UK sectors like energy infrastructure, tech start-ups, and public services.

Building a British Model Based on Global Success

Reeves told the BBC that the current setup of UK public sector pension funds is too fragmented to yield strong returns for British savers. "Our pension funds in Britain are too small to be making the investments that get a good return for people saving for retirement and to help our economy to grow," she emphasized.

In countries like Canada and Australia, pensions for local government employees—teachers, civil servants, and more—are pooled into a few large funds, allowing for significant global investments. "They probably have the best pension funds anywhere in the world," Reeves said, aiming to replicate this successful model in the UK.

A Strategic Push to Drive Economic Growth

The new pension megafunds are part of Reeves' broader strategy to drive economic growth. Her announcement comes on the heels of rising business discontent over the increase in employer National Insurance contributions, which were included in the Budget. While acknowledging the critiques, Reeves defended the move, saying, "I'm not immune to those criticisms, but it was necessary to increase taxes” to ensure public services are well-funded and the state’s finances remain stable.

The consolidation effort involves merging the council pension funds—which collectively hold £354 billion in assets and are currently managed by local government officials—into megafunds run by fund managers. Reeves highlighted that these larger funds would be encouraged to invest in their local economies, setting specific targets for local investment as part of their mandates.

Private Sector Reforms and Unlocking Billions for UK Investment

The government’s pension reforms also target the private sector, aiming to set minimum size limits for defined contribution schemes, which manage around £800 billion in assets. This move seeks to consolidate the 60 or so multi-employer schemes to create more efficient, high-yield investment opportunities.

If successful, the government’s plans could release a staggering £80 billion into the UK economy, according to their estimates. Reeves emphasized that the current situation, where Canadian and Australian pension funds hold significant investments in UK assets while British savers do not, “made no sense at all.” She added, "It’s about time British pensioners benefitted from the long-term growth opportunities that exist right here in the UK