The government has fleshed out its plans to double the number of "pension megafunds" alongside reforms expected to have a major impact on real estate and infrastructure investment in the UK.
The government has published its Pensions Investment Review – Final Report and its response to the Options for Defined Benefit schemes consultation, setting out what will be addressed in legislation, in particular, the Pensions Scheme Bill due later this year.
Announcing the publications the Treasury said reforms to be introduced through its Pension Schemes Bill will mean all multi-employer defined contribution pension schemes and local government pension scheme pools operate at "megafund level", managing at least £25 billion in assets by 2030. It said evidence from Australia and Canada shows that this size allows pension funds to invest in big infrastructure projects and private businesses, boosting the economy while potentially driving higher returns for savers.
It added that the changes will drive more investment directly into the UK economy for new homes and scale-up businesses, with over £50 billion secured through the recent voluntary commitment from pension funds to invest 5% of assets in the UK and new local investment targets for LGPS authorities.
The Minister of Pensions, Torsten Bell, also today provided a separate update on the government's consultation on defined benefit pension schemes.
The Labour administration has already made much of its plans to speed up a long-running drive to merge the UK's 86 council pension schemes into a handful of pooled "pension megafunds", as well as to push for private sector workers' defined-contribution pension schemes to be pooled into bigger funds.
It has previously termed it the "biggest set of pension reforms in decades, unlocking billions of pounds of investment in exciting new businesses and infrastructure and local projects".
A process began in 2015 to pool the 86 authority pension schemes into eight funds, but progress has been slow as it takes time to create the low costs and scale required.
As part of today's updated legislation multi-employer defined contribution pension schemes will be required to operate at megafund level, managing £25 billion or more in assets, and the £392 billion Local Government Pension Scheme will consolidate assets currently split over 86 administering authorities into six pools.
Defined contribution schemes will be given more freedom through legislation to move savers into better performing funds, enabling bulk transfer of assets into the megafunds. Schemes worth over £10 billion that are unable to reach the minimum size requirement by the end of the decade will be allowed to continue operating, as long as they can demonstrate a clear plan to reach £25 billion by 2035.
The government said the Mansion House Accord shows DC schemes are voluntarily investing more in infrastructure and businesses. To provide additional certainty that individual schemes will not lose business by investing in private markets, which offer the potential for higher returns but are expensive to invest in upfront, the government said it will take a reserve power in the Pension Schemes Bill to set binding asset allocation targets.
The Pensions Investment Review confirms the March 2026 deadline for LGPS asset pooling, with a backstop power set to be taken in the Pension Schemes Bill to protect the interests of LGPS members and local taxpayers by directing an administering authority to participate in a specific investment pool.
Local investment targets will be agreed with LGPS authorities for the first time as well, securing £27.5 billion the government says for local priorities. LGPS authorities will work with regional mayors, Welsh authorities and councils to back projects.
The final report of the Pensions Investment Review will be published here.
The government says its move to accelerate creation of these megafunds will mirror the situation in Australia and Canada, where pension funds take advantage of size to invest in assets that have higher growth potential.
Canada’s top schemes, known as the Maple 8, include Ontario Teachers' Pension Plan and Canada Pension Plan Investment Board and collectively manage around £1.1 trillion worth of taxpayer-backed pension schemes for public sector workers. They have invested billions in the UK, including in major real estate and infrastructure, such as stakes in Associated British Ports, Westfield Stratford shopping centre, and the redevelopment of the BBC Television Centre in west London.
The government says the move tackles a gradual decline in domestic investment from UK pension funds, where around 20% of defined contribution assets are invested compared with over 50% in 2012. The government says the reforms will also drive higher returns for savers, in part by cutting waste in the system.
In a DC scheme, a fund of money is built up from the individual's contributions, those an employer makes and tax relief from the government. Employees can choose their own funds and switch between them. Managers therefore often offer only liquid investments that can be traded daily, which creates a problem for an illiquid asset class like real estate. The market is also highly fragmented with a large number of very small schemes.
Also, the Pension Policy Institute estimates that 96% of DC members are investing in the default option which often does not include a real estate fund. Research from Columbia Threadneedle finds that, on average, 20 years before retirement only 0.7% of a DC portfolio is invested in real estate.
Chancellor of the Exchequer, Rachel Reeves, said in a statement:
"We’re making pensions work for Britain. These reforms mean better returns for workers and billions more invested in clean energy and high-growth businesses – the Plan for Change in action."
Deputy Prime Minister, Angela Rayner said: "The untapped potential of the £392 billion Local Government Pension Scheme is enormous. Through these reforms we will make sure it drives growth and opportunities in communities across the country for years to come – delivering on our Plan for Change. Today’s pensions announcements follow a month of major delivery milestones for the Plan for Change: new trade deals with India, the US and the EU, UK growth the highest in the G7, and the fourth interest rate cut since last summer after the government secure the economy’s foundations."
Ion Fletcher, director, British Property Federation, welcomed the updates: “DC pension schemes are the future of pension money in the UK, but their potential to transform our towns and cities has been stymied by fragmentation and lack of scale. The government’s focus on supporting ‘megafunds’ will create pools of capital with the firepower and expertise needed to invest in major infrastructure projects benefitting the UK’s local and national economy, as well as individual pension pots.
“We have seen first-hand the impact of similar approaches in Australia and Canada, with huge investment into the commercial and living sectors and support any initiatives that enables capital to enhance our buildings, towns and cities.”
Property tax expert John Forbes of John Forbes Consulting raised some concerns about the latest update: "Although nothing is going to happen immediately as a result of the government’s Pensions Investment Review – Final Report and its response to the Options for Defined Benefit schemes consultation, both of which were published today, it does set out what will be addressed in forthcoming legislation, in particular the Pensions Scheme Bill due later this year.
"Both publications cover a lot of different topics that affect investment in illiquid assets that have been under discussion for many years and are gradually moving towards a final conclusion.
"The threat of compulsion for DC schemes to invest in illiquid assets if they do not is unhelpful. There is a compelling investment case for investing in real estate and other illiquid assets. The suggestion of coercion if this does not happen creates an unfortunate suspicion that the trustee’s fiduciary duty is being overridden, regardless of what the government says. I hope that this is taken into consideration in the proposals in the Pensions Scheme Bill.
"There are some useful points of detail that have been flagged – for example the Stamp Duty Land Tax challenges faced in further LGPS consolidation so it is good news that government accepts this and will seek to address it.
"It is going to be a busy few months as the detail is addressed in future consultations, the Pensions Scheme Bill and the Value for Money Framework."