Rachel Reeves will announce plans to merge local government retirement schemes into “megafunds” as she tries to revive long-running efforts to overhaul the UK’s public pension system.
She will tell an audience of City leaders and chief executives on Thursday that she will introduce a pensions bill next year aimed at pooling assets from the 86 separate local government pension schemes (LGPS) into eight funds, worth about £50bn, by 2030.
Grouped together, the LGPS represents one of the world’s largest defined-benefit schemes, with 6.5 million members and £360bn in assets.
The decision is meant to mirror similar setups in Australia and Canada, where public-sector pension schemes have been consolidated into larger funds that are managed in-house by professional investors. The idea is that retirement funds can then invest larger sums into a wider range of riskier and long-term assets such as infrastructure, startups and private equity, while saving on fees paid to bankers, lawyers and advisers.
In the chancellor’s inaugural Mansion House speech she will also confirm plans to combine smaller defined-contribution schemes across the country into pools of £25bn to £50bn.
If the programme is successful, the government claims that it will be part of the “biggest pension reforms in decades” while saving money on fees for councils and boosting investment for local areas and national infrastructure.
However, Reeves’s announcements echo those made by previous Conservative governments. In 2015, David Cameron, then prime minister, tried to push local funds into eight larger pools. But his changes failed to set a deadline for consolidation – which has so far only resulted in about 39% of LGPS assets being pooled into larger funds – and the process itself came under fire for adding further layers of costs for individual schemes.
Last autumn, the former Conservative chancellor Jeremy Hunt also hinted at further consolidation, saying that by 2040 all local government pension fund assets would be invested in vehicles worth £200bn or more, leading many to speculate that he wanted to cut groupings down into two or three pools.
The Treasury said the government would soon consult on plans to “take advantage of pension fund size and improve their governance”.
The consultation will include plans to have each administering authority set targets for investment in their local economies. The Treasury claims that a 5% target for local investment could secure £20bn for communities. The government said the process would involve independent reviews to ensure each of the 86 administering authorities was “fit for purpose”.
However, the chancellor is now under pressure to add green targets to her pension reforms, after leading British actors including Mark Rylance, Olivia Colman and Benedict Cumberbatch called for an increase investment in clean energy.
Members of the performing arts union Equity have written an open letter to Reeves before her Mansion House speech, asking her to follow through on a key manifesto pledge of requiring financial institutions to adopt science-based plans for limiting global heating. Equity says this means pension funds, banks and insurers could no longer do business with companies expanding fossil fuels.
The letter also asks the government to update fiduciary duty law, so that acting in savers’ “best interests” means taking the effects of the climate crisis and damage to nature into account.
Reeves’s Mansion House address is also expected to include plans to shake up the Financial Ombudsman Service. She is also expected to push ahead with another Conservative party plan for a hybrid stock market – known as the Private Intermittent Securities and Capital Exchange System (Pisces) – that will allow private companies to trade shares at intervals, in an attempt to revive the UK’s flagging IPO market.
“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,” Reeves said in a statement.
“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.”