Rachel Reeves insists a Canadian-style overhaul of British pensions will help fire-up the flagging economy.
Ms Reeves will unveil plans today for pension “megafunds” that she says will help unlock billions of pounds of investment in businesses and infrastructure.
Her shake-up will consolidate defined contribution (DC) schemes and pool assets from 86 local government pension scheme authorities.
The Local Government Pension Scheme in England and Wales will manage assets worth around £500 billion by 2030.
These assets are currently split across 86 different administering authorities, with local government officials and councillors managing each fund.
But experts have warned that savers could be left exposed if the scheme performs poorly.
Tom Selby, director of public policy at AJ Bell, said: “The government’s hope will be that by moving from having 86 local government schemes down to a single one, or a few, will benefit from economies of scale.
“My overarching concern is that the needs of the saver, whose money is ultimately going to be risked, will be forgotten about.
“There’s a reason that an occupational scheme has a trustee to look after the interests of members.
“Part of that is investing their money to maximise returns and get the best retirement outcomes possible.
“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.
“If it goes well, everyone can celebrate.
“But it’s clearly possible that it will go the other way, so 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.”
Consolidating the assets into a handful of funds run by professional fund managers will allow them to invest more in assets such as infrastructure, supporting economic growth and local investment on behalf of the 6.7 million public servants, the Government said.
DC pension schemes are set to manage £800billion-worth of assets by the end of the decade.
Megafunds will mirror schemes in Australia and Canada, where pension funds take advantage of size to invest in assets that have higher growth potential, the Government said.
It said the move could deliver around £80billion of investment in new businesses and critical infrastructure.
Ms Reeves’s first Mansion House speech on Thursday takes place amid criticism from the hospitality sector and warnings that changes to employers’ national insurance (NI) contributions could lead to job losses.
Ms Reeves 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.
“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.”
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.”
The Government said analysis indicates that pension funds start to return greater productive investment levels once the size of assets they manage reaches between £25 to £50 billion – a point where they are better placed to invest in a wider range of assets.
Megafunds 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.
Tom McPhail, director of public affairs at consultancy the Lang Cat said: “I’d urge caution here with the leap of faith that the Government is making.
“Is it safe to assume that all schemes will want to invest in the opportunities they’ve outlined?
“While investment in UK infrastructure is welcome, surely where these schemes invest is down to the trustees and they may have other ideas on what will deliver the best returns for their members.”
Association of British Insurers director general Hannah Gurga said: “We support the Government’s focus on the role of pensions to drive growth in the UK economy.
“Pension investments are for savers’ futures and any policy and investment decisions must be driven by a focus on the long-term, with savers’ interests at heart.
“We look forward to hearing more about the Government’s plans and will continue to work closely with our members and wider industry to deliver on mutual priorities for pensions.”