Pension “megafunds” are set to be created to help unlock billions of pounds of investment in UK businesses and infrastructure.
Rachel Reeves will use her first Mansion House speech on Thursday as chancellor to outline what is billed as the biggest pensions shake-up in decades.
Consolidating assets into a handful of funds run by professional fund managers will allow them to invest more in infrastructure, supporting economic growth and local investment on behalf of the UK’s 6.7 million public servants, the government says.
It predicts the move could deliver around £80bn of investment in new businesses and critical infrastructure.
The reforms, which will be introduced through a new Pension Schemes Bill next year, involve consolidating defined contribution (DC) schemes, as well as pooling assets from 86 local-government pension scheme authorities.
There are already around 60 different multi-employer schemes, such as the Independent Schools’ Pension Scheme, each investing savers’ money into one or more funds.
The government will consult on setting a minimum size requirement for these funds.
Treasury analysis indicates that pension funds start to return greater productive investment levels once the size of assets they manage reaches between £25 to £50bn – when they are better placed to invest in a wider range of assets.
Bigger pensions funds of greater than £50bn in assets can harness further benefits, including the ability to invest directly in large-scale projects at a lower cost, it added.
Megafunds, which will mirror schemes in Australia and Canada, will need to meet rigorous standards to ensure they deliver for savers, such as needing to be authorised by the Financial Conduct Authority (FCA), the government said.
The Local Government Pension Scheme in England and Wales has assets that are currently split across 86 administering authorities. By 2030, they are forecast to be worth around £500bn.
DC pension schemes are expected to manage £800bn worth of assets by then.
Ms Reeves’s speech takes place amid warnings that changes to employers’ national insurance (NI) contributions could cause job losses.
The chancellor said: “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.”
Deputy prime minister Angela Rayner said: “This is about harnessing the untapped potential of the pensions belonging to millions of people, and using it as a force for good in boosting our economy.”
Jon Greer, head of retirement policy at wealth manager Quilter, said: “If managed carefully, this consolidation could open new doors for UK pensions, enabling access to infrastructure and private equity investments with strong return potential.
“However, the success of this will depend heavily on the availability of new infrastructure projects to invest in.
“Large funds need substantial, reliable projects to generate returns, but the market may struggle to offer enough of these opportunities, especially in the infrastructure sector.”
Tom Selby, director of public policy at AJ Bell, said: “Conflating a government goal of driving investment in the UK and people’s retirement outcomes brings a danger because the risks are all taken with members’ money.”
He added: “There needs to be some caution in this push to use other people’s money to drive economic growth. It needs to be made very clear to members what is happening with their money.”
Tom McPhail, director of public affairs at consultancy the Lang Cat urged caution, saying: “Is it safe to assume that all schemes will want to invest in the opportunities they’ve outlined?”