Rachel Reeves will tear up workplace pension rules as part of a broader shake-up that the Chancellor claims will unlock up to £80bn in investment.
In her maiden Mansion House speech on Thursday, Ms Reeves will set out plans to create British “megafunds” led by both local government and the private sector.
By pooling the pots together, Ms Reeves hopes it will give them the firepower to invest in a broader range of UK and overseas assets, including infrastructure and high-growth companies.
The speech will also unveil plans to condense the Local Government Pension Scheme (LGPS), currently a collection of 86 separate funds worth a combined £360bn, into fewer, bigger pots.
The Bank of England and City regulator will also be given new objectives to help drive economic growth.
Andrew Bailey, the Bank’s governor, will also address the annual bankers’ banquet where he will set out the challenges of boosting Britain’s anaemic growth rate.
Separately, the new Lord Mayor Alastair King will call for a shake-up of Britain’s ISA market, including in cash and shares, as he urges the Government to give savers more choice to invest in high-growth companies before they list on the stock market.
Ms Reeves has hailed what is the “biggest set of reforms to the pensions market in decades”, claiming it will “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”.
However, businesses warned that Ms Reeves’s £40bn tax raid is already squeezing their “headroom to invest” and is eroding a message that Britain was open for business.
Workplace pensions are currently regulated by both the Financial Conduct Authority (FCA) and the Pensions Regulator (TPR).
While the existing framework has already driven widespread consolidation in so-called trust-based schemes, including the formation of about three dozen master trusts that manage the savings of millions of workers, consolidation across the larger market of group personal pensions (GPP) is much harder.
This is because, under FCA rules, pots cannot be merged easily without “individual saver consent”, which the regulator has previously warned is “costly to obtain and unlikely to be fully achievable given typical saver disengagement”.
The Treasury wants to make it easier for these “contract-based” schemes, which account for roughly £300bn of the half a trillion within defined contribution pension pots, to perform “bulk transfers” that will drive faster consolidation of fast-growing workplace pensions.
However, businesses warned Ms Reeves not to add to the burden on business after they were hit with a £25bn jobs tax in the Budget.
Louise Hellem, chief economist at the Confederation of British Industry (CBI), said: “Unlocking investment also needs competitive and profitable businesses. With the Budget piling additional costs on firms and squeezing their headroom to invest, the Government needs to work hard to regain confidence in the UK as a place where businesses and communities can succeed. Pension schemes will want to operate within a UK economy that is prospering.”
The Lord Mayor will use his speech to urge the government to widen investment opportunities for British savers.
“We need to develop additional mechanisms for the UK pensions industry to invest in both pre-IPO and IPO funds – re-energising our capital markets, and combatting the current view among many European businesses that they need to turn to the US for funding,” he will say.
The UK currently has the second-largest pool of pension assets in the world. However, the current fragmented system of thousands of small pots has led to a series of warnings that British savers are losing out on higher returns.
Previous analysis by the Government’s Actuary estimated that the LGPS could reach around £950bn in assets in 2040, with the previous government suggesting this would lead to “a smaller number of pools averaging £200bn in the future”.