Reeves outlines plan for £25bn pension 'megafunds'

The government has fleshed out its plans for reforming the UK pension industry, including the creation of £25bn "megafunds" which will be instructed to make a portion of their investments locally to help fuel economic growth.

The chancellor said the overhaul, designed to follow the example of Australia and Canada's huge pension investment funds, would also boost people's pension pots.

"These reforms mean better returns for workers and billions more invested in clean energy and high-growth businesses," Rachel Reeves said.

Seventeen of the UK's largest pension firms already approved the gist of these reforms in a voluntary agreement earlier this month.

One of Labour's first moves after taking office last year was the announcement of a pension review.

In November the chancellor floated her "megafunds" plan, which covers retirement savings for the majority of UK workers in two ways.

Firstly, there are the 86 different local authority pension schemes, which provide for more than six million people in their retirement, the majority low-paid women. The £392bn in these defined benefit schemes will be merged in just six asset pools by March next year.

In a defined benefit scheme a worker pays into their pension and is paid a pre-determined amount based on their salary and length of service.

Local investment targets will be agreed for local authority pension schemes for the first time, the Treasury said.

Secondly, defined contribution schemes currently worth £800bn, and covering millions of other private and public sector workers across the country, will also be consolidated.

In defined contribution schemes workers are not guaranteed a specific amount. Instead their pension depends on the performance of the fund in the years before retirement.

By 2030 the government says there should be more than 20 pension funds worth more than £25bn, in contrast to the current 10.

As part of the voluntary agreement, known as the Mansion House accord, agreed earlier in May, the 17 firms involved committed to investing 10% of their assets in things other than publicly traded shares, so that more money would flow into homebuilding, infrastructure projects and start-up businesses in fast-growing sectors.

In addition, 5% of investments will be earmarked to go into UK assets.

The reforms will form part of the Pension Schemes Bill, about to go before Parliament.

The new approach would mean over £50bn of additional investment in UK infrastructure, new homes and businesses, the Treasury said.

On Thursday the government is publishing the final report from its Pensions Investment Review.

It said the review found the reforms would drive higher returns for pension savers through cutting waste, economies of scale and improved investment strategies.

As a result workers on average earnings could see a £6,000 boost to their defined contribution pension pot, the Treasury said.

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