UK Government announces pension reforms to combine pension funds and increase domestic investment
UK Government announces pension reforms to combine pension funds and increase domestic investment
The UK Government’s sweeping pension reforms aim to combine pension funds and increase domestic investment, but raise questions about risk, returns and saver protections.
The UK Government has revealed plans to double the number of pension megafunds managing £25bn or more by 2030 through the upcoming Pension Schemes Bill.
The reforms will consolidate multi-employer Defined Contribution (DC) pension schemes and Local Government Pension Scheme (LGPS) pools to boost investment in UK infrastructure, housing and businesses, with an estimated £50bn to be channelled into the economy.
The move is aimed at addressing a decline in domestic pension fund investments.
Currently, only about 20% of DC pension assets are invested in the UK, down from over 50% in 2012. The reforms mandate that DC schemes and LGPS pools operate at megafund scale, managing at least £25bn by 2030.
Schemes with over £10bn unable to meet this target must outline plans to reach £25bn by 2035. The Government cites Canada and Australia, where larger funds invest in infrastructure and private businesses, potentially yielding higher returns.
Consolidation is projected to save £1bn in scheme fees annually by 2030 through economies of scale and improved governance. The Government estimates an average earner’s DC pension pot could increase by £6,000 at retirement, with further gains expected from the Pension Schemes Bill, though these depend on market performance and implementation.
The bill will also permit DC schemes to transfer savers’ assets into better-performing funds and grant powers to enforce asset allocation targets.
The pensions minister Torsten Bell, comments: “Our economic strategy is about delivering real change, not tinkering around the edges.
“When it comes to pensions, size matters, so our plans will double the number of £25 billion plus megafunds. These reforms will mean bigger, better pension schemes, delivering a better retirement for millions and high investment in Britain.”
Deputy Prime Minister Angela Rayner also noted in the announcement that consolidating the £392bn LGPS into six pools could support local priorities for the 6.7 million public servants whose savings are managed through such schemes. Local investment targets are expected to secure £27.5bn for regional projects.
The Pension Schemes Bill will also address small pension pots and require schemes to demonstrate value.
What this means for UK pension holders
For UK workers with DC pensions or LGPS memberships, the reforms may alter how their savings are managed. Savers could see their pension pots moved into larger megafunds, potentially benefiting from lower costs and diversified investments in infrastructure or businesses.
However, the projected £6,000 boost is not guaranteed, hinging on market conditions and fund performance.
Public sector workers may see their pensions increasingly fund local projects, raising questions about investment risks.
The Pension Schemes Bill will introduce measures to ensure value for money, but savers should monitor how their funds are managed and the implications for their retirement.
The Government plans to legislate asset allocation targets, including a 5% commitment to UK assets. This has sparked concerns that compelling certain investments could lead to inferior outcomes.
Critics argue that forcing pension funds to prioritise domestic projects could compromise returns, as investment decisions may be driven by policy rather than financial merit.
Private markets, such as infrastructure or start-ups, often carry higher risks and costs, potentially affecting savers’ pensions if projects underperform. There’s also worry about reduced diversification, as over-concentration in UK assets could expose funds to domestic economic volatility.
For LGPS members, local investment targets might lead to scrutiny over whether projects align with community needs or favour political priorities. While the Government insists savers’ interests will be protected, some fear the reserve powers to enforce targets could limit fund managers’ independence, raising questions about long-term pension security.
While framed as a step toward economic growth, the reforms’ impact on savers and the economy remains uncertain.
Edmund Greaves is editor of Mouthy Money and host of the Mouthy Money podcast. Formerly deputy editor of Moneywise magazine, he has worked in journalism for over a decade in politics, travel and now money.