UK pension ‘megafund’ reform a bold step with unanswered questions

Mark Baker, pension law expert at Pinsent Masons, was commenting on the “bold steps” set out in chancellor Rachel Reeves’s first Mansion House speech.

Reeves outlined the most significant pension reform in decades, which will involve merging local government pension scheme (LGPS) assets and consolidating schemes into larger, more powerful funds. The reforms, to be introduced through a new Pensions Schemes Bill next year, will create the “megafunds” through consolidating DC schemes and pooling assets from 86 LGPS funds.

The chancellor will consult on setting a minimum size for DC master trusts, from £25 billion to £50 billion, in a bid to further drive economic growth and enhance the retirement saving of millions.

DC master trust schemes are a type of pension scheme that pools the retirement savings of employees from multiple employers into a single trust. The schemes are managed by a board of trustees, with the pooling of resources designed to allow a focus on performance, cost and value for members.

The chancellor’s proposed approach mirrors models in Australia and Canada, where larger pension funds have achieved higher returns by investing in a broader range of assets, including infrastructure and private equity. The move could potentially unlock £80 billion for investment in infrastructure and new business, according to government analysis.

“Contract-based” schemes, where workers have a direct contract with the pensions provider, will also be affected by Reeves’s proposals. More detail is expected in the interim report of the government’s pensions review.

Baker said: “While this is a bold step by the chancellor, there are a number of questions, including ‘by when?’. It will also be important to avoid disorderly change in the short term, ensuring employers won’t be bounced between providers in an immediate drive to scale. There are interesting questions posed about the market dynamic, and care will be needed by regulators in handling trusts’ and providers’ business plans.”

Baker said that, as these reforms take shape, they will be closely watched by stakeholders across the financial and public sectors.

This initiative is part of a broader economic strategy by the UK government to stimulate growth and stability, with Reeves’ recent budget laying the groundwork for these reforms.